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The Basic Macroeconomics of Debt Swaps

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  • Velasco, Andres
  • Larrain, Felipe

Abstract

In any debt swap, a country must surrender an asset to extinguish a liability. To retire its foreign debt, government must first purchase internationally traded assets from the domestic private sector. How this purchase is financed has important macroeconomic implications. Money-financed swaps can induce depreciation of the parallel exchange rate, temporary current-account deficit, and reserve losses. Bond-financed swaps can increase interest payments, since domestic debt typically carries higher real interest than foreign debt. If swaps lead to sustained domestic debt accumulation, which agents perceive will be monetized, the inflation rate will rise as soon as the swap program begins. Copyright 1993 by Royal Economic Society.

Suggested Citation

  • Velasco, Andres & Larrain, Felipe, 1993. "The Basic Macroeconomics of Debt Swaps," Oxford Economic Papers, Oxford University Press, vol. 45(2), pages 207-228, April.
  • Handle: RePEc:oup:oxecpp:v:45:y:1993:i:2:p:207-28
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    Cited by:

    1. Bowe, M. & Dean, J.W., 1997. "Has the Market Solved the Sovereign-Debt Crisis?," Princeton Studies in International Economics 83, International Economics Section, Departement of Economics Princeton University,.

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