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Effects of Currency Devaluations on the Economic Growth in Developing Countries: The Role of Foreign Currency-Denominated Debt


  • Giacomo Saibene


  • Silvia Sicouri



Assuming that a developing country has to denominate its debts in the currencies of the principal creditor countries, how is the country’s economic performance affected when currency devaluation occurs? The aim of this paper is to prove that devaluation can be contractionary and that its occurrence can be the result of a self-fulfilling prophecy. Assuming credit constraints on firms’ borrowing capacity and nominal price rigidities, a sharp change in the value of the domestic currency leads to an increase in the real costs of foreign currency-denominated debt. Hence, firms’ profits as well as their borrowing capacity decrease, provoking a drop in future investment and output. Moreover, expectations about future output can alone trigger a currency devaluation, confirming the initial expectations in a self-fulfilling way. Finally, it is discussed in an empirical analysis the impact of devaluation on the economic growth in a sample of five countries. Copyright International Atlantic Economic Society 2012

Suggested Citation

  • Giacomo Saibene & Silvia Sicouri, 2012. "Effects of Currency Devaluations on the Economic Growth in Developing Countries: The Role of Foreign Currency-Denominated Debt," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 40(2), pages 191-209, June.
  • Handle: RePEc:kap:atlecj:v:40:y:2012:i:2:p:191-209
    DOI: 10.1007/s11293-011-9300-4

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    References listed on IDEAS

    1. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
    2. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(4), pages 459-472, November.
    3. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
    4. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    5. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
    6. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
    7. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part I: A Macroeconomic Overview," NBER Working Papers 6833, National Bureau of Economic Research, Inc.
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    More about this item


    Foreign currency denominated debt; Devaluation; Growth; Developing countries; F30; International Finance;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General


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