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Real Exchange Rate and External Public Debt in Emerging and Developing Countries

Author

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  • Grégory Donnat

    (Université Côte d'Azur, CNRS, GREDEG, France)

Abstract

Developing countries implement policies to maintain a stable exchange rate, with export-led growth strategies to spur economic growth and stability. The real exchange rate is a key factor of external competitiveness but can also cause economic and financial disruptions. These countries are dependent on external financing which impacts the real exchange rate movements over the medium and long run. We empirically explore the response of the real exchange rate to external public indebtedness in developing countries, from 1975 to 2017, using the iterative Bayesian shrinkage procedure to handle the cross-country differences in panel data. The contribution to the literature is twofold. First, we find that the change in the real exchange rate depends on the external public indebtedness in an inverted U-shape relationship in developing countries. Second, we determine an external debt threshold that minimizes changes in the real exchange rate for each country.

Suggested Citation

  • Grégory Donnat, 2025. "Real Exchange Rate and External Public Debt in Emerging and Developing Countries," GREDEG Working Papers 2025-15, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    • Handle: RePEc:gre:wpaper:2025-15
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    More about this item

    Keywords

    Real Exchange Rate; External Debt; Developing Countries; Heterogeneity;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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