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Debt Buildup and Currency Vulnerability: Evidence from Global Markets

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  • Donghyun Park
  • Arief Ramayandi
  • Shu Tian

Abstract

Debts have risen rapidly since the global financial crisis. While the literature acknowledges that rapid debt buildups can harm the economy and exacerbate recessions, their impact on currency vulnerability is still empirically under-investigated. This study examines how public and private debt buildups are related to currency depreciation pressure by analyzing the evidence from 59 advanced and emerging markets. Our results suggest that both private and public debt exacerbates currency vulnerability, but the effect of private debt is more robust and consistently significant. We also find that excessive private debt buildup is more harmful in emerging markets, and greater dependence on external financing exacerbates the impact of debt buildup on currency stress. Overall, the evidence highlights the importance of a comprehensive debt surveillance framework that monitors both public and private debt buildup, especially in emerging markets.

Suggested Citation

  • Donghyun Park & Arief Ramayandi & Shu Tian, 2022. "Debt Buildup and Currency Vulnerability: Evidence from Global Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(7), pages 2017-2035, May.
    • Handle: RePEc:mes:emfitr:v:58:y:2022:i:7:p:2017-2035
    DOI: 10.1080/1540496X.2021.1949982
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    References listed on IDEAS

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    1. Douglas Sutherland & Peter Hoeller, 2012. "Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics," OECD Economics Department Working Papers 1006, OECD Publishing.
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    Cited by:

    1. Behrooz Gharleghi, 2023. "Debt and currency value during COVID‐19 in the Global South," Economic Affairs, Wiley Blackwell, vol. 43(2), pages 201-210, June.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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