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Erscheinungsjahr: 
2021
Schriftenreihe/Nr.: 
IES Working Paper No. 6/2021
Verlag: 
Charles University in Prague, Institute of Economic Studies (IES), Prague
Zusammenfassung: 
We investigate the long-term effect of domestic currency depreciation on the external debt for a panel of 41 emerging economies over the years 1999-2019. Using heterogenous panel cointegration methods, we find that domestic currency depreciation leads to an increase in external debt to GDP ratio over the long-term and it reduces the sustainability of external debt. This is particularly the case for larger depreciations, while smaller depreciations might reduce the external debt burden over the long-term for more developed emerging economies. Poorer emerging economies face a greater increase in external debt burden following domestic currency depreciation. We also find that higher exchange rate volatility and the use of floating exchange rates contributes to an increase in external debt burden over the long-term. Consequently, our results suggest that for emerging economies, having more volatile and floating exchange rates reduces the sustainability of external debt. We find asymmetrical effects of exchange rate depreciation on external debt: higher central bank independence limits the effect of currency depreciation on external debt, while higher financial development and illicit financial flows augment the effect of depreciation on external debt.
Schlagwörter: 
external debt
exchange rate
currency depreciation
exchange rate volatility
exchange rate regime
DFE estimator
PMG estimator
JEL: 
E50
F31
F34
Dokumentart: 
Working Paper

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