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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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    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. 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.
    3. 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.
    4. 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.
    5. Olivier Jean Blanchard, 1983. "Debt and the Current Account Deficit in Brazil," NBER Chapters, in: Financial Policies and the World Capital Market: The Problem of Latin American Countries, pages 187-198, National Bureau of Economic Research, Inc.
    6. 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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