Public Debt Dynamics and Intra-Year Exchange Rate Fluctuations

November 20, 2020

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Santiago Acosta Ormaechea. Public Debt Dynamics and Intra-Year Exchange Rate Fluctuations, (USA: International Monetary Fund, 2020) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The public sector, in carrying out its operations, often incurs foreign currency denominated liabilities and, as such, is exposed to exchange rate fluctuations that could affect the value of public debt to GDP ratios over time. This paper shows that converting foreign currency denominated flows and stocks into local currency using the average and the end-of-period exchange rates, respectively, as envisaged in public finance manuals, gives rise to an identifiable stock-flow adjustment term—due to intra-year exchange rate fluctuations—that affects public debt accumulation. Importantly, the inclusion of this often-ignored stock-flow adjustment term is critical to accurately project public debt levels and any related indicator that could in turn inform about the risk of debt distress. Using a novel dataset covering 82 countries during 2008–19, the paper shows that this stock flow adjustment term is sizable in countries experiencing large exchange rate depreciations, namely above the 99th percentile of the full sample, reaching 1.2 percent of GDP. Interestingly, the measurement of policy-related concepts such as interest rate-growth differentials and debt stabilizing primary balances are also affected by intra-year exchange rate fluctuations, and in non-negligible ways.

Subject: Asset and liability management, Asset valuation, Currencies, Exchange rates, Fiscal policy, Fiscal stance, Foreign exchange, Money, Public debt

Keywords: Accumulation equation, Asset valuation, Currencies, Debt projection, Debt stabilizing primary balance, Debt stabilizing primary balance., End-of-period exchange rates, Exchange rates, Fiscal stance, Global, Heightened exchange rate volatility, Interest rate-growth differential, Intra-year exchange rate fluctuations, Nominal exchange rate depreciation, Public debt dynamics, WP, Year exchange rate fluctuation

Publication Details

Pages:

21
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/261
Stock No:

WPIEA2020261
ISBN:

9781513561585
ISSN:

1018-5941

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