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External debt sustainability and policy rules in a small globalized economy

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  • Porcile, Gabriel
  • de Souza, Alexandre Gomes
  • Viana, Ricardo

Abstract

The paper develops a Post Keynesian macroeconomic model which discusses the conditions that lead to an external debt crisis in a small developing economy fully integrated to global goods and financial markets. The focus is on how policy rules affect the stability of the economy. Two kinds of policy rules are discussed, namely inflation target and real exchange rate target, implemented through an interest rate operation procedure (IROP). It is argued that in both cases the evolution of the real exchange rate should be closely monitored to avoid external instability. It is also suggested that a real exchange rate target may be more effective to stabilize the economy if there is a strong tendency towards the equality of the foreign and domestic real interest rates.

Suggested Citation

  • Porcile, Gabriel & de Souza, Alexandre Gomes & Viana, Ricardo, 2011. "External debt sustainability and policy rules in a small globalized economy," Structural Change and Economic Dynamics, Elsevier, vol. 22(3), pages 269-276, September.
    • Handle: RePEc:eee:streco:v:22:y:2011:i:3:p:269-276
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    3. Carlos A. Carrasco & Jesus Ferreiro, 2014. "Latin American inflation differentials with USA inflation: does Inflation Targeting make a difference?," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 17(1), pages 13-32, March.
    4. Köhler, Karsten, 2016. "Currency devaluations, aggregate demand, and debt dynamics in an economy with foreign currency liabilities," IPE Working Papers 78/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    5. Leonardo Vera, 2014. "The Simple Post-Keynesian Monetary Policy Model: An Open Economy Approach," Review of Political Economy, Taylor & Francis Journals, vol. 26(4), pages 526-548, October.

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