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Effects of Currency Devaluations on the Economic Growth in Developing Countries: The Role of Foreign Currency-Denominated Debt

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  • Giacomo Saibene
  • Silvia Sicouri

Abstract

Assuming that a developing country has to denominate its debts in the currencies of the principal creditor countries, how is the country’s economic performance affected when currency devaluation occurs? The aim of this paper is to prove that devaluation can be contractionary and that its occurrence can be the result of a self-fulfilling prophecy. Assuming credit constraints on firms’ borrowing capacity and nominal price rigidities, a sharp change in the value of the domestic currency leads to an increase in the real costs of foreign currency-denominated debt. Hence, firms’ profits as well as their borrowing capacity decrease, provoking a drop in future investment and output. Moreover, expectations about future output can alone trigger a currency devaluation, confirming the initial expectations in a self-fulfilling way. Finally, it is discussed in an empirical analysis the impact of devaluation on the economic growth in a sample of five countries. Copyright International Atlantic Economic Society 2012

Suggested Citation

  • Giacomo Saibene & Silvia Sicouri, 2012. "Effects of Currency Devaluations on the Economic Growth in Developing Countries: The Role of Foreign Currency-Denominated Debt," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 40(2), pages 191-209, June.
  • Handle: RePEc:kap:atlecj:v:40:y:2012:i:2:p:191-209
    DOI: 10.1007/s11293-011-9300-4
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    References listed on IDEAS

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    Cited by:

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    3. Adebayo Mohammed, Ojuolape & H. Agboola, Yusuf & K. Moshood, Alabi & O. Abdullah, Oladipupo, 2020. "The Effects of Currency Devaluation on Output Growth in Developing Economies with Currency Crises," Working Papers 7, Department of Economics, University of Ilorin.

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    More about this item

    Keywords

    Foreign currency denominated debt; Devaluation; Growth; Developing countries; F30; International Finance;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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