IDEAS home Printed from https://ideas.repec.org/p/lev/wrkpap/wp_1087.html

A Model of External Debt Sustainability and Monetary Hierarchy

Author

Listed:
  • Nicolas M. Burotto

Abstract

The author develops a dynamic macroeconomic model of a small open economy to identify two key vulnerabilities that prevent emerging markets from fully integrating into global markets: high financial integration costs and their low position in the international monetary hierarchy. These vulnerabilities make them susceptible to financial traps, jeopardize debt sustainability, and increase volatility. He shows that the weak response of capital flows to interest rates further limits the ability of monetary policy to stabilize the system. As a result, these economies have restricted policy options and often resort to mimicking external monetary policy strategies in times of financial distress.

Suggested Citation

  • Nicolas M. Burotto, 2025. "A Model of External Debt Sustainability and Monetary Hierarchy," Economics Working Paper Archive wp_1087, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_1087
    as

    Download full text from publisher

    File URL: https://www.levyinstitute.org/wp-content/uploads/2025/07/wp_1087.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Olivier Blanchard, 2019. "Public Debt and Low Interest Rates," American Economic Review, American Economic Association, vol. 109(4), pages 1197-1229, April.
    2. Robert A. Blecker, 2016. "The debate over ‘Thirlwall's law’: balance-of-payments-constrained growth reconsidered," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 13(3), pages 275-290, December.
    3. Olivier J Blanchard, 2019. "Public Debt: Fiscal and Welfare Costs in a Time of Low Interest Rates," Policy Briefs PB19-2, Peterson Institute for International Economics.
    4. Roberto Frenkel & Martin Rapetti, 2009. "A developing country view of the current global crisis: what should not be forgotten and what should be done," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 33(4), pages 685-702, July.
    5. James K. Galbraith, 2023. "In Defense of Low Interest Rates," Economics Policy Note Archive 23-3, Levy Economics Institute.
    6. Alberto Botta, 2017. "Dutch Disease-cum-financialization booms and external balance cycles in developing countries," Brazilian Journal of Political Economy, Center of Political Economy, vol. 37(3), pages 459-477.
    7. Eaton, Jonathan & Taylor, Lance, 1986. "Developing country finance and debt," Journal of Development Economics, Elsevier, vol. 22(1), pages 209-265, June.
    8. Duncan K. Foley, 2003. "Financial fragility in developing economies," Chapters, in: Amitava Krishna Dutt (ed.), Development Economics and Structuralist Macroeconomics, chapter 8, Edward Elgar Publishing.
    9. Barbara Fritz & Luiz F. de Paula & Daniela Magalhães Prates, 2018. "Global currency hierarchy and national policy space: a framework for peripheral economies," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 15(2), pages 208-218, September.
    10. Emmanuel Farhi & Matteo Maggiori, 2018. "A Model of the International Monetary System," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(1), pages 295-355.
    11. Suman S. Basu & Atish R. Ghosh & Jonathan D. Ostry & Pablo E. Winant, 2018. "Managing Capital Outflows with Limited Reserves," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(2), pages 333-374, June.
    12. Mitali Das & Gita Gopinath & Ṣebnem Kalemli-Özcan, 2021. "Preemptive Policies and Risk-Off Shocks in Emerging Markets," NBER Working Papers 29615, National Bureau of Economic Research, Inc.
    13. Rudiger Dornbusch, 1984. "On the Consequences of Muddling Through the Debt Crisis," The World Economy, Wiley Blackwell, vol. 7(2), pages 145-162, June.
    14. Leila E Davis & Joao Paulo A de Souza & Gonzalo Hernandez, 2019. "An empirical analysis of Minsky regimes in the US economy," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 43(3), pages 541-583.
    15. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ly Dai Hung, 2022. "Safe Assets at Financial Globalization," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 13(03), pages 1-21, October.
    2. Rogoff, Kenneth, 2021. "Fiscal sustainability in the aftermath of the great pause," Journal of Policy Modeling, Elsevier, vol. 43(4), pages 783-793.
    3. Rogoff, Kenneth, 2020. "Falling real interest rates, rising debt: A free lunch?," Journal of Policy Modeling, Elsevier, vol. 42(4), pages 778-790.
    4. Alexander Beames & Mariano Kulish & Nadine Yamout, 2022. "Fiscal Policy and the Slowdown in Trend Growth in an Open Economy," Working Papers 143, Red Nacional de Investigadores en Economía (RedNIE).
    5. Christian Breuer, 2020. "Goverment Debt Post COVID-19: Back To Golden Rules," Chemnitz Economic Papers 041, Department of Economics, Chemnitz University of Technology, revised Feb 2020.
    6. Ludger Schuknecht, 2019. "Fiscal-Financial Vulnerabilities," CESifo Working Paper Series 7776, CESifo.
    7. Daisuke Miyashita, 2023. "Public debt and income inequality in an endogenous growth model with elastic labor supply," International Journal of Economic Policy Studies, Springer, vol. 17(2), pages 447-472, August.
    8. Schuster, Florian & Krahé, Max & Sigl-Glöckner, Philippa, 2021. "Wird die Konjunkturkomponente der Schuldenbremse in ihrer heutigen Ausgestaltung ihrer Aufgabe noch gerecht? Analyse und ein Reformvorschlag," Papers 277885, Dezernat Zukunft - Institute for Macrofinance, Berlin.
    9. Karl Whelan, 2021. "Central banks and inflation: where do we stand and how did we get here?," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 18(3), pages 310–330-3, December.
    10. Dammann, Felix & Rodosthenous, Neofytos & Villeneuve, Stéphane, 2025. "A Stochastic Non-Zero-Sum Game of Controlling the Debt-to-GDP Ratio," Center for Mathematical Economics Working Papers 730, Center for Mathematical Economics, Bielefeld University.
    11. Max Krahé & Florian Schuster & Philippa Sigl-Glöckner, 2021. "Wird die Konjunkturkomponente der Schuldenbremse ihrer Aufgabe noch gerecht? [Is the Cyclical Component of the Debt Brake Still Up to Its Task?]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 101(8), pages 621-628, August.
    12. Gergő Motyovszki & Philipp Pfeiffer & Jan in ’t Veld, 2024. "The Implications of Public Investment for Debt Sustainability," European Economy - Discussion Papers 204, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    13. Langenmayr Dominika & Mittermaier Ferdinand, 2021. "Nachhaltiges Wirtschaften, nachhaltig finanziert: Herausforderungen für die Politik in den 2020er Jahren," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 22(3), pages 176-190, September.
    14. Battistini, Niccolò & Callegari, Giovanni, 2020. "Public spending at the effective lower bound: how significant are the sustainability risks?," Research Bulletin, European Central Bank, vol. 67.
    15. Reserve Bank of India, 2022. "Monetary and fiscal policy interactions in the wake of the pandemic," BIS Papers chapters, in: Bank for International Settlements (ed.), The monetary-fiscal policy nexus in the wake of the pandemic, volume 122, pages 149-157, Bank for International Settlements.
    16. Chakraborty, Lekha S, 2022. "Analysing Union Budget 2022-23: Fiscal Policy and Global Uncertainties," MPRA Paper 112700, University Library of Munich, Germany.
    17. Federico Bassi, 2020. "Chronic Excess Capacity and Unemployment Hysteresis in EU Countries. A Structural Approach," DISCE - Working Papers del Dipartimento di Economia e Finanza def091, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    18. Kohler, Karsten, 2019. "Exchange rate dynamics, balance sheet effects, and capital flows. A Minskyan model of emerging market boom-bust cycles," Structural Change and Economic Dynamics, Elsevier, vol. 51(C), pages 270-283.
    19. Jussi Lindgren, 2021. "Examination of Interest-Growth Differentials and the Risk of Sovereign Insolvency," Risks, MDPI, vol. 9(4), pages 1-14, April.
    20. Charles Gottlieb & Jan GrobovsÌŒek & Markus Poschke & Fernando Saltiel, 2020. "Working from home: Implications for developing countries," Vox eBook Chapters, in: Simeon Djankov & Ugo Panizza (ed.), COVID-19 in Developing Economies, edition 1, volume 1, chapter 1, pages 242-256, Centre for Economic Policy Research.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_1087. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lindsey Carter (email available below). General contact details of provider: https://www.levyinstitute.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.