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Monetary Policy Reaction to Foreign Debt Accumulation in Developing Countries

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  • Fry, Maxwell J

Abstract

Recent research indicates that current account imbalances in the three largest industrial countries are self-correcting, but the situation appears to be different in a sample of 26 developing countries examined here. Part of the reason may lie in different monetary policy responses to foreign debt buildup in these developing countries. While cumulated current account deficits generate stabilizing forces, possibly through financial wealth effects, large amounts of government and government-guaranteed debt produce destabilizing effects by stimulating capital flight. Monetary policy reactions are stabilizing in the case of cumulated current account deficits, but destabilizing in the case of a buildup of government and government-guaranteed foreign debt. Copyright 1993 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Fry, Maxwell J, 1993. "Monetary Policy Reaction to Foreign Debt Accumulation in Developing Countries," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(0), pages 60-75, Suppl..
    • Handle: RePEc:bla:manch2:v:61:y:1993:i:0:p:60-75
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    Cited by:

    1. Ms. Sweta Chaman Saxena & Meenakshi Rishi & Ms. Valerie Cerra, 2005. "Robbing the Riches: Capital Flight, Institutions, and Instability," IMF Working Papers 2005/199, International Monetary Fund.
    2. Ouyang, Alice Y. & Rajan, Ramkishen S. & Willett, Thomas D., 2010. "China as a reserve sink: The evidence from offset and sterilization coefficients," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 951-972, September.
    3. Savvides, Andreas, 1998. "Inflation and monetary policy in selected West and Central African countries," World Development, Elsevier, vol. 26(5), pages 809-827, May.
    4. Valerie Cerra & Meenakshi Rishi & Sweta Saxena, 2008. "Robbing the Riches: Capital Flight, Institutions and Debt," Journal of Development Studies, Taylor & Francis Journals, vol. 44(8), pages 1190-1213.
    5. Alice Ouyang & Ramkishen Rajan & Tom Willett, 2008. "Managing the Monetary Consequences of Reserve Accumulation in Emerging Asia," Global Economic Review, Taylor & Francis Journals, vol. 37(2), pages 171-199.
    6. Niels Hermes & Robert Lensink & Victor Murinde, 2002. "Flight Capital and its Reversal for Development Financing," WIDER Working Paper Series DP2002-99, World Institute for Development Economic Research (UNU-WIDER).
    7. Chihi, Foued & Normandin, Michel, 2013. "External and budget deficits in some developing countries," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 77-98.

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