Open AccessDebt sustainability and exchange stabilisation: Towards a new theory
Author(s) -
Olivier Basdevant,
Theuns J. De Wet
Publication year - 2000
Publication title -
suid-afrikaanse tydskrif vir ekonomiese en bestuurswetenskappe/south african journal of economic and management sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.277
H-Index - 17
eISSN - 2222-3436
pISSN - 1015-8812
DOI - 10.4102/sajems.v3i3.2622
Subject(s) - exchange rate , debt , sustainability , economics , external debt , monetary economics , balance (ability) , balance of trade , internal debt , international economics , debt to gdp ratio , macroeconomics , medicine , ecology , physical medicine and rehabilitation , biology
The sustainability of debt is a crucial issue in developing and transitional economies. In this paper, it shows that a bubble in the real exchange rate could result in a sudden collapse in the sustainability of a country's debt. Furthermore, it is shown that monetary authorities may be unable to control the exchange rate, as its dynamics also depends on that of the debt. Hence, the only feasible policy measure to stabilise the real exchange rate is to increase domestic non-price competitiveness to ensure an improvement in the trade balance of the economy.