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Currency Depreciations in Emerging Economies: A Blessing or a Curse for External Debt Management?

Author

Listed:
  • Boris Fisera

    (Slovak Academy of Sciences
    Charles University, Prague)

  • Menbere Workie Tiruneh

    (Slovak Academy of Sciences
    Webster Vienna Private University)

  • David Hojdan

    (Webster Vienna Private University)

Abstract

We investigate the long-term effect of domestic currency depreciation on the external debt for a panel of 41 emerging economies over the years 1999-2019. Using heterogenous panel cointegration methods, we find that domestic currency depreciation leads to an increase in external debt to GDP ratio over the long-term and it reduces the sustainability of external debt. This is particularly the case for larger depreciations, while smaller depreciations might reduce the external debt burden over the long-term for more developed emerging economies. Poorer emerging economies face a greater increase in external debt burden following domestic currency depreciation. We also find that higher exchange rate volatility and the use of floating exchange rates contributes to an increase in external debt burden over the long-term. Consequently, our results suggest that for emerging economies, having more volatile and floating exchange rates reduces the sustainability of external debt. We find asymmetrical effects of exchange rate depreciation on external debt: higher central bank independence limits the effect of currency depreciation on external debt, while higher financial development and illicit financial flows augment the effect of depreciation on external debt.

Suggested Citation

  • Boris Fisera & Menbere Workie Tiruneh & David Hojdan, 2021. "Currency Depreciations in Emerging Economies: A Blessing or a Curse for External Debt Management?," Working Papers IES 2021/06, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Mar 2021.
    • Handle: RePEc:fau:wpaper:wp2021_06
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    File URL: https://ies.fsv.cuni.cz/en/veda-vyzkum/working-papers/6399
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    Cited by:

    1. Coulibaly, Issiaka & Gnimassoun, Blaise & Mighri, Hamza & Saadaoui, Jamel, 2024. "International reserves, currency depreciation and public debt: New evidence of buffer effects in Africa," Emerging Markets Review, Elsevier, vol. 60(C).
    2. Fisera, Boris, 2024. "Exchange rates and the speed of economic recovery: The role of financial development," Economic Systems, Elsevier, vol. 48(1).
    3. CHANNOUFI, Sabrine, 2025. "Assessment Of The Exchange Rate Risk Exposure In Tunisia'S External Public Debt Portfolio: A Delta-Normal Var Approach In The Context Of Sustainable Finance Development," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 29(3), pages 6-29, September.
    4. Boris Fisera & Menbere Workie Tiruneh, 2023. "Beyond the Balassa-Samuelson Effect: Do Remittances Trigger the Dutch Disease?," Eastern European Economics, Taylor & Francis Journals, vol. 61(1), pages 23-65, January.

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    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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