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Debt Thresholds and Real Exchange Rates: An Emerging Markets Perspective

Author

Listed:
  • Vahagn Galstyan

    (Department of Economics, Trinity College Dublin)

  • Adnan Velic

    (Dublin Intitute of Technology)

Abstract

In this paper we empirically analyze nonlinearities in short-run real exchange rate dynamics. Our findings suggest that real exchange rate misalignments are considerably less persistent and more volatile during times of high debt. Assessing the variance of changes in misalignments, we retrieve evidence indicating that the nominal exchange rate and inflation differentials are more important determinants in states of high debt than in states of low debt. Overall, our results imply that nonlinearities have non-negligible implications for the mechanics of real exchange rate adjustment in emerging markets.

Suggested Citation

  • Vahagn Galstyan & Adnan Velic, 2016. "Debt Thresholds and Real Exchange Rates: An Emerging Markets Perspective," Trinity Economics Papers tep0416, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduee:tep0416
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    Cited by:

    1. Vahagn Galstyan & Adnan Velic, 2018. "Public debt and relative prices in a cross-section of countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(2), pages 229-245, May.
    2. Takefumi Yamazaki, 2018. "Financial friction sources in emerging economies: Structural estimation of sovereign default models," Discussion papers ron303, Policy Research Institute, Ministry of Finance Japan.
    3. Choi, Woo Jin & Taylor, Alan M., 2022. "Precaution versus mercantilism: Reserve accumulation, capital controls, and the real exchange rate," Journal of International Economics, Elsevier, vol. 139(C).
    4. Vahagn Galstyan & Adnan Velic, 2017. "Taxation, Debt and Relative Prices in the Long Run: The Irish Experience," The Economic and Social Review, Economic and Social Studies, vol. 48(3), pages 231-251.
    5. Supriya Kapoor & Adnan Velic, 2022. "QE: Implications for Bank Risk-Taking, Profitability, and Systemic Risk," Trinity Economics Papers tep0122, Trinity College Dublin, Department of Economics.
    6. Adnan Velic, 2024. "Current Account Imbalances, Real Exchange Rates, and Nominal Exchange Rate Variability," Open Economies Review, Springer, vol. 35(3), pages 497-545, July.

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    JEL classification:

    • F00 - International Economics - - General - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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