Foreign Debt and Fear of Floating: A Theoretical Exploration

Discussion Papers from Department of Economics, University of York

Abstract: This paper explores the relationship between the denomination of public debt and the choice of exchange rate regime. Unlike indexed domestic debt, foreign debt is subject to valuation effects from real exchange rate shocks. In a standard set-up, where a peg functions only as a nominal anchor, more foreign debt makes pegging less attractive, because it increases the value of a fexible exchange rate as a shock absorber. This result can be reversed if we incorporate the stylized fact that pegs have lower real exchange rate volatility, and if external shocks are sufficiently large relative to domestic shocks.

Keywords: inflation; output; public debt and exchange rate regimes. (search for similar items in EconPapers)
JEL-codes: F33 H63 (search for similar items in EconPapers)
Date: 2008-05
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.york.ac.uk/media/economics/documents/discussionpapers/2008/0810.pdf Main text (application/pdf)

Related works:
Working Paper: Foreign Debt and Fear of Floating: A Theoretical Exploration (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:08/10

Access Statistics for this paper

More papers in Discussion Papers from Department of Economics, University of York Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom. Contact information at EDIRC.
Bibliographic data for series maintained by Paul Hodgson ().