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A Dependent Economy Model of Employment, Real Exchange Rate and Debt Dynamics: Towards an Understanding of Pandemic Crisis

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  • Moumita Basu
  • Rilina Basu
  • Ranjanendra Narayan Nag

Abstract

Given the unforeseen and uncertain circumstances during the pandemic, the role of government expenditure becomes extremely relevant in sustaining lives and livelihoods of the masses. This brings forth public sector deficit as a key issue of macroeconomic policy debate. This article aims at investigating the effects of an unanticipated adverse shock like COVID-19, on the real value of public debt, in a small open economy, consisting of traded and non-traded sectors, along with proposed management of such crisis with fiscal and monetary expansion. The results of policy-induced and exogenous shocks depend on the difference in the speeds of adjustments in real exchange rate, interest rate and real value of debt, and the associated multitudes of cross effects. While an unanticipated adverse shock like COVID-19 causes contraction of both traded and non-traded sectors and reduces consumption expenditure, investment expenditure and level of employment and real value of aggregate income in the short run, fiscal expansion causes higher real value of debt and lower real exchange rate. JEL Codes: E12, E62, H63

Suggested Citation

  • Moumita Basu & Rilina Basu & Ranjanendra Narayan Nag, 2022. "A Dependent Economy Model of Employment, Real Exchange Rate and Debt Dynamics: Towards an Understanding of Pandemic Crisis," Foreign Trade Review, , vol. 57(1), pages 85-113, February.
    • Handle: RePEc:sae:fortra:v:57:y:2022:i:1:p:85-113
    DOI: 10.1177/00157325211048018
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    1. Moumita Basu & Rilina Basu & Ranjanendra Narayan Nag, 2024. "Inflation Adjustment, Endogenous Risk Premium and Exchange Rate: A Theoretical Analysis," Foreign Trade Review, , vol. 59(2), pages 225-251, May.
    2. Yabesh Ombwori Kongo & Elvis Kimani Kiano & Joash Ogolla Ogada & Peter Isaboke Omboto, 2023. "The Effect of Debt Service Ratio and Exchange Rate on Public Debt Sustainability in Kenya," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(11), pages 302-312, November.

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    More about this item

    Keywords

    Debt dynamics; real exchange rate; dependent economy; level of employment;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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