External Debt, Budget Deficits and Disequilibrium Exchange Rates

Rudiger Dornbusch

NBER Working Paper No. 1336 (Also Reprint No. r0675)
Issued in 1986
NBER Program(s):   ITI   IFM

The paper investigates the sources of debt and debt difficulties for a group of Latin American countries. It is argued that external shocks -- oil, interest rates, world recession and the fall in real commodity prices -- cannot account by themselves for the problems. Budget deficits that accommodate terms of trade deterioration and disequilibrium exchange rates are central to a complete explanation. The paper documents that in Chile an extreme currency overvaluation led to a massive shift into imported consumer durables while in Argentina overvaluation in conjunction with financial instability led to large-scale capital flight. In the case of Brazil the budget deficit is the explanation for the growth in external indebtedness.The difference in the experience of the three countries reflects the difference in their openness to the world economy.

(500 K)

Published: Dornbusch, Rudiger. "External Debt, Budget Deficits and Disequilibrium Exchange Rates." International Debt and the Developing Countries, edited by G . Smith and J. Cuddington. Washington D.C.: World Bank, (March 1985).

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