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Foreign Exchange, Interest and the Dynamics of Public Debt in Latin America

Author

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  • Carlos E. Schonerwald da Silva
  • Matías Vernengo

Abstract

The relationship between the exchange rate and public debt is intermediated by two mechanisms. On the one hand, exchange rate devaluation implies higher payment on local currency over the debt denominated in foreign currency. On the other hand, the rise of public debt leads a perception of higher default risk, forcing capital outflows and a devaluation of the exchange rate. The present paper develops a simple model where the exchange is crucial to analyze public debt dynamics. The paper also discusses the recent trajectory of the public debt in Latin America. The dynamics of the exchange rate is important for developing countries that do not have strong currencies and have a significant portion of public debt denominated in US dollars (original sin). Also, primary budget surpluses were crucial for the consistent and significant reduction of the public debt-to-GDP ratio. Hence, the economic expansion has created a larger fiscal space for Latin American economies to expand infrastructure and social spending, and reduce unemployment levels.

Suggested Citation

  • Carlos E. Schonerwald da Silva & Matías Vernengo, 2007. "Foreign Exchange, Interest and the Dynamics of Public Debt in Latin America," Working Paper Series, Department of Economics, University of Utah 2007_02, University of Utah, Department of Economics.
    • Handle: RePEc:uta:papers:2007_02
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    References listed on IDEAS

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    1. Alcino F. Câmara Neto & Matias Vernengo, 2004. "Fiscal policy and the Washington consensus: a Post Keynesian perspective," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 27(2), pages 333-343.
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    7. Barry Eichengreen & Ashoka Mody, 2000. "What Explains Changing Spreads on Emerging Market Debt?," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 107-134, National Bureau of Economic Research, Inc.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Stock-Flow with Consistent Accounting (SFCA) models
      by Matias Vernengo in Naked Keynesianism on 2012-07-21 19:49:00

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    Cited by:

    1. Charles, Sebastien & Dallery, Thomas, 2013. "L’expiation par l’austérité ou la stratégie de l’échec : une interprétation post-keynésienne de la crise des pays périphériques en zone euro [Expiation through austerity or the strategy of failure: a Post-Keynesian explanation of sovereign debt cr," MPRA Paper 65735, University Library of Munich, Germany.
    2. Nathan Perry & Carlos Schönerwald, 2009. "Institutions, Geography, and Terms of Trade in Latin America: A Longitudinal Econometric Analysis," Working Paper Series, Department of Economics, University of Utah 2009_04, University of Utah, Department of Economics.

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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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