Public Debt Dynamics and Intra-Year Exchange Rate Fluctuations

Ormaechea, Santiago Acosta

doi:10.5089/9781513561585.001

Cited by 5 publications

(2 citation statements)

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“…Furthermore, governments also borrow in foreign currency, which includes exchange rate and stock-flow adjustments into the group of important factors of debt dynamics. Additionally, privatizations, contingent liabilities and other flows have effects on public debt dynamics, but they do not have structural effects on debt (Acosta-Ormaechea, 2020).…”

Section: Introductionmentioning

confidence: 99%

Does Debt Have Threshold Effects on Medium-Term Growth? Evidence from European Union Countries

Fir¹

2022

Naše Gospodarstvo/Our Economy

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Debt has become an important factor in economic activity and its extent has incentivized many researchers to incorporate it into contemporary growth models. On the positive side, debt has the ability to smoothen private consumption, firms’ investment and government expenditure in relation to their corresponding income, subsequently leading to better capital allocation. However, the history of debt defaults and lessons from European sovereign debt crises, which were accompanied by strict austerity measures, have warned us about the danger of debt overhang and unsustainable debt burdens. This paper tackles the question of the existence of a turning point, at which the negative effects of debt start to prevail in the economic process. In the sample of European Union countries in the period from 1995 to 2019, the author of this paper investigated the presence of threshold effects of government, non-financial corporate and household debt on medium-term growth following the paper by Mika and Žumer (2017). The author first confirmed the concave-shaped relationship between public debt and growth with a threshold of 111.6% of GDP, based on Eurostat debt-to-GDP data. In contrast, private debt was found to have first lag effects with an accompanied convex-shaped relationship between private debt and growth and with a corresponding threshold of 149.8% of GDP. Next, the author divided private debt into non-financial corporate and household debt to investigate a more detailed relationship between debt and growth. Corresponding to the Global Debt Database, the concave-shaped relationship between public debt and growth was confirmed with a threshold of 104.8% of GDP. Both of the investigated types of private debt confirmed the previously explored lagged impact on medium-term growth and a convex-shaped relationship between non-financial corporate and household debt and growth. The threshold of non-financial corporate debt stands at 138.3% of GDP, while that for household debt is 145.1% of GDP. Considering the presence of thresholds may offer an important message to economic policymakers, as timely and suitable governance can lead to either higher economic growth or prevent adverse effects of excessive indebtedness.

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Section: Introductionmentioning

confidence: 99%

Does Debt Have Threshold Effects on Medium-Term Growth? Evidence from European Union Countries

Fir¹

2022

Naše Gospodarstvo/Our Economy

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“…This allows us to reproduce the debt projections of the LIC DSF and the MAC DSA. For further details on how intra-year exchange rate fluctuations affect public debt and their empirical relevance see Acosta-Ormaechea (2020).…”

Section: Introductionmentioning

confidence: 99%

A Guide and Tool for Projecting Public Debt and Fiscal Adjustment Paths with Local- and Foreign-Currency Debt

Martínez¹,

Ormaechea²

2021

Technical Notes and Manuals

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Determinants and international transmission of interest rates: Do foreign reserves and sovereign debt matter?

Afonso,

Huart,

Jalles

et al. 2024

Rev International Economics

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We analyze the role of international reserves and sovereign debt in the determination and international transmission of interest rates. We develop a model that describes the money market equilibrium with capital account openness. It predicts that higher levels of international reserves lead to lower interest rates whereas the effect of higher government debt is ambiguous. We then test empirically these predictions on a panel of 128 countries over 1985–2019. We find that: (i) the transmission of U.S. interest rates to domestic interest rates is stronger in emerging market economies (EMEs) than in advanced economies (AEs) for short‐term interest rates (STIR), and vice versa for long‐term interest rates (LTIR); (ii) international reserves help counteract the transmission of the U.S. policy rate on STIR in EMEs; (iii) a higher sovereign debt level is associated with lower interest rates in EMEs (liquidity effect), but higher interest rates in developing economies (risk premium effect).

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Public Debt Dynamics and Intra-Year Exchange Rate Fluctuations

Cited by 5 publications

References 1 publication

Does Debt Have Threshold Effects on Medium-Term Growth? Evidence from European Union Countries

Does Debt Have Threshold Effects on Medium-Term Growth? Evidence from European Union Countries

A Guide and Tool for Projecting Public Debt and Fiscal Adjustment Paths with Local- and Foreign-Currency Debt

Determinants and international transmission of interest rates: Do foreign reserves and sovereign debt matter?

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