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Devaluation, Debt, and Default in Emerging Economies

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  • Samir Jahjah

  • Peter Montiel

Abstract

We explore the interactions between exchange rate and fiscal policy, and default on external debt. Exchange rate policy affects the supply of short-term debt facing the government. Under a conventional soft peg, it can be optimal for the government to set the exchange rate at a level in which partial default occurs. In this case multiple equilibria exist, with one featuring high interest rate, overvalued exchange rate, low level of output, and default. Default is also an equilibrium under a hard peg, precisely because devaluation is not an option. Under a hard peg, however, there is a unique equilibrium. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • Samir Jahjah & Peter Montiel, 2007. "Devaluation, Debt, and Default in Emerging Economies," Open Economies Review, Springer, vol. 18(1), pages 77-93, February.
    • Handle: RePEc:kap:openec:v:18:y:2007:i:1:p:77-93
    DOI: 10.1007/s11079-007-9005-0
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    References listed on IDEAS

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    Cited by:

    1. Mr. Felix Fischer & Charlotte J. Lundgren & Mr. Samir Jahjah, 2013. "Making Monetary Policy More Effective: The Case of the Democratic Republic of the Congo," IMF Working Papers 2013/226, International Monetary Fund.
    2. Stefan Eichler & Dominik Maltritz, 2011. "Stock Market‐Induced Currency Crises—A New Type of Twins," Review of Development Economics, Wiley Blackwell, vol. 15(2), pages 223-236, May.

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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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