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External Debt, Budget Deficits and Disequilibrium Exchange Rates

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  • R. Dornbusch

Abstract

The paper investigates the sources of debt and debt difficulties for a group of Latin American countries. It is argued that external shocks -- oil, interest rates, world recession and the fall in real commodity prices -- cannot account by themselves for the problems. Budget deficits that accommodate terms of trade deterioration and disequilibrium exchange rates are central to a complete explanation. The paper documents that in Chile an extreme currency overvaluation led to a massive shift into imported consumer durables while in Argentina overvaluation in conjunction with financial instability led to large-scale capital flight. In the case of Brazil the budget deficit is the explanation for the growth in external indebtedness.The difference in the experience of the three countries reflects the difference in their openness to the world economy.
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Suggested Citation

  • R. Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," Working papers 347, Massachusetts Institute of Technology (MIT), Department of Economics.
  • Handle: RePEc:mit:worpap:347
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    2. Bruno, Michael, 1976. "The Two-Sector Open Economy and the Real Exchange Rate," American Economic Review, American Economic Association, vol. 66(4), pages 566-577, September.
    3. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-153, February.
    4. Obstfeld, Maurice, 1983. "Intertemporal price speculation and the optimal current-account deficit," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 135-145, August.
    5. Jeffrey Sachs, 1982. "LDC Debt in the 1980s: Risk and Reforms," NBER Working Papers 0861, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Aizenman, Joshua, 1990. "External debt, planning horizon, and distorted credit markets," Journal of International Money and Finance, Elsevier, vol. 9(2), pages 138-158, June.
    2. Lenno Uuskula & Peeter Luikmel & Jana Kask, 2005. "Critical Levels of Debt?," Bank of Estonia Working Papers 2005-3, Bank of Estonia, revised 10 Oct 2005.
    3. Lisa M. Schineller, 1997. "An econometric model of capital flight from developing countries," International Finance Discussion Papers 579, Board of Governors of the Federal Reserve System (U.S.).
    4. Yin-Wong Cheung & XingWang Qian, 2010. "Capital Flight: China's Experience," Review of Development Economics, Wiley Blackwell, vol. 14(2), pages 227-247, May.
    5. Aizenman, Joshua, 1991. "Trade dependency, bargaining and external debt," Journal of International Economics, Elsevier, vol. 31(1-2), pages 101-120, August.
    6. De Melo, Jaime, 1988. "CGE models for the analysis of trade policy in developing countries," Policy Research Working Paper Series 3, The World Bank.
    7. Zahler, Roberto & Valdivia, Mario, 1987. "Asimetrías de la liberalización financiera y el problema de las deudas interna y externa," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 35845, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    8. Cheung, Yin-Wong & Steinkamp, Sven & Westermann, Frank, 2016. "China's capital flight: Pre- and post-crisis experiences," Journal of International Money and Finance, Elsevier, vol. 66(C), pages 88-112.
    9. Swastika, Purti & Dewandaru, Ginanjar & Masih, Mansur, 2013. "The Impact of Debt on Economic Growth: A Case Study of Indonesia," MPRA Paper 58837, University Library of Munich, Germany.
    10. Alesina, Alberto & Tabellini, Guido, 1989. "External debt, capital flight and political risk," Journal of International Economics, Elsevier, vol. 27(3-4), pages 199-220, November.
    11. Manuel Ramos -Francia & Ana María Aguilar-Argaez & Santiago García-Verdú & Gabriel Cuadra-García, 2013. "Heading into Trouble: A Comparison of the Latin American Crises and the Euro Area’s Current Crisis," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 87-165, January-j.
    12. Eyzaguirre, Nicolás, 1987. "Impacto de shocks macroeconómicos sobre la situación financiera en las empresas," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 35844, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    13. Menbere Workie Tiruneh, 2004. "An Empirical Investigation Into the Determinants of External Indebtedness," Prague Economic Papers, University of Economics, Prague, vol. 2004(3), pages 261-277.
    14. Aizenman, Joshua, 1991. "Inward versus Outward Growth Orientation in the Presence of Country Risk," Economica, London School of Economics and Political Science, vol. 58(229), pages 57-77, February.
    15. Castrén, Olli & Takalo, Tuomas & Wood, Geoffrey, 2004. "Labour market reform and the sustainability of exchange rate pegs," Research Discussion Papers 22/2004, Bank of Finland.
    16. Rodrik, Dani, 1993. "Trade Liberalization in Disinflation," CEPR Discussion Papers 832, C.E.P.R. Discussion Papers.
    17. Neyra, Héctor, 1989. "Ahorro, desequilibrios fiscales y el endeudamiento externo: Perú 1968-1988," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 33328, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    18. Donges, Juergen B. & Hiemenz, Ulrich, 1985. "Export liberalization and the outward oriented trade regime," Kiel Working Papers 241, Kiel Institute for the World Economy (IfW).
    19. Nogues, Julio, 1986. "The nature of Argentina's policy reforms during 1976-1981," MPRA Paper 57820, University Library of Munich, Germany.
    20. Joshua Aizenman, 1987. "Successful Adjustment in a Multi-Sectoral Economy," NBER Working Papers 2202, National Bureau of Economic Research, Inc.
    21. Joshua Aizenman, 1994. "World Integration, Competitive and Bargaining-Regime Switch: An Exploration," Canadian Journal of Economics, Canadian Economics Association, vol. 27(2), pages 458-483, May.
    22. Joshua Aizenman, 1987. "Investment, Openness, and Country Risk," NBER Working Papers 2410, National Bureau of Economic Research, Inc.
    23. Paul Mc-Nelis, 1985. "Política de Indización e Inestabilidad Inflacionaria en el Cono Sur," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 22(65), pages 99-116.
    24. Condon, Timothy & Corbo, Vittorio & De Melo, Jaime, 1989. "Exchange rate based disinflation, wage rigidity, and capital inflows : tradeoffs for Chile, 1977-81," Policy Research Working Paper Series 146, The World Bank.

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