Exchange Rate Policy and Debt Crises in Emerging Economies

March 1, 2003

Preview Citation

Format: Chicago

Peter J Montiel, and Samir Jahjah. Exchange Rate Policy and Debt Crises in Emerging Economies, (USA: International Monetary Fund, 2003) accessed November 12, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We explore a model intended to capture the interaction between exchange rate policy, fiscal policy, and outright default on foreign-currency denominated debt. We examine how the exchange rate affects the supply of short-term debt facing the government. We show that under a credible hard peg (currency board), default is a more likely outcome, even without an exceptionally large short-term debt, precisely because a devaluation is not an option. In a more conventional fixed peg, it can be optimal for the government to choose a level of the exchange rate that would be likely to result in partial or complete debt default. Depending on the exchange rate regime, multiple equilibria exist, in one of which the interest rate is high, the exchange rate is overvalued, output is low, and default is high. Under a hard peg, there is a unique equilibrium.

Subject: Debt default, Exchange rate adjustments, Exchange rate policy, Exchange rates, External debt, Foreign exchange, Real exchange rates

Keywords: Debt crises, Debt default, Debt repudiation, Debt service, Default, Default rate, Devaluation, Exchange rate adjustments, Exchange rate depreciation, Exchange rate misalignment, Exchange rate overvaluation, Exchange rate peg, Exchange rate policy, Exchange rate response curve, Exchange rates, Fiscal policy, Foreign currency, Government default, Interest rate, Long-term debt, Real exchange rates, Short-term debt, Supply curve, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/060
Stock No:

WPIEA0602003
ISBN:

9781451848076
ISSN:

1018-5941

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