{
  "title": "Exchange Rate Policy and Debt Crises in Emerging Economies",
  "publication": "IMF Working Papers, March 1, 2003",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/exchange-rate-policy-and-debt-crises-in-emerging-economies-16382",
  "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/30/exchange-rate-policy-and-debt-crises-in-emerging-economies-16382",
  "overlayPath": "/en/publications/wp/issues/2016/12/30/exchange-rate-policy-and-debt-crises-in-emerging-economies-16382/index.md",
  "summary": "We explore a model intended to capture the interaction between exchange rate policy, fiscal policy, and outright default on foreign-currency denominated debt. We examine how the exchange rate affects the supply of short-term debt facing the government.",
  "sections": [
    {
      "heading": "Summary findings",
      "content": "- The model captures interaction between exchange rate policy, fiscal policy, and outright default on foreign-currency denominated debt.\n- Under a credible hard peg (currency board), default is a more likely outcome even without an exceptionally large short-term debt, because devaluation is not an option.\n- Under a conventional fixed peg, the government may optimally choose an exchange rate level that is likely to result in partial or complete debt default.\n- Depending on the exchange rate regime, multiple equilibria can exist; one equilibrium features:\n  - high interest rate,\n  - overvalued exchange rate,\n  - low output,\n  - high default.\n- Under a hard peg, there is a unique equilibrium."
    },
    {
      "heading": "Model mechanisms and channels",
      "content": "- The exchange rate affects the supply of short-term debt facing the government.\n- Credible hard peg removes devaluation as a policy option, altering default incentives.\n- Fixed peg regimes allow the government discretion over the exchange rate level, potentially inducing policies that increase default likelihood."
    },
    {
      "heading": "Scenarios and equilibria",
      "content": "- Multiple equilibria under certain exchange rate regimes:\n  - Equilibrium A (adverse): high interest rate; exchange rate overvaluation; low output; high default.\n  - Equilibrium B (more favorable): not described in detail in the summary, but implied to contrast with Equilibrium A.\n- Unique equilibrium under a credible hard peg characterized by the absence of multiple self-fulfilling outcomes."
    },
    {
      "heading": "Policy implications",
      "content": "- Exchange rate regime choice materially affects government default risk on foreign-currency debt.\n- Hard pegs (currency boards) can increase default probability by eliminating devaluation as an adjustment mechanism.\n- Under fixed pegs, governments may set exchange rates that trade off exchange rate stability against higher default risk; policymakers should consider this trade-off when designing exchange rate and fiscal policies.\n\n---\n\n Content in this bundle\n\n- Exchange Rate Policy and Debt Crises in Emerging Economies - WP/03/60, corrected\n  - Exchange Rate Policy and Debt Crises in Emerging Economies - WP/03/60, corrected (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Exchange Rate Policy and Debt Crises in Emerging Economies - WP/03/60, corrected (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/exchange-rate-policy-and-debt-crises-in-emerging-economies-16382"
    }
  ],
  "bullets": [
    "[Markdown version](/en/publications/wp/issues/2016/12/30/exchange-rate-policy-and-debt-crises-in-emerging-economies-16382/index.md)",
    "[Structured JSON version](/en/publications/wp/issues/2016/12/30/exchange-rate-policy-and-debt-crises-in-emerging-economies-16382/index.json)",
    "[Bundle manifest](/en/publications/wp/issues/2016/12/30/exchange-rate-policy-and-debt-crises-in-emerging-economies-16382/bundle-manifest.json)",
    "Authors: Peter J Montiel, Samir Jahjah",
    "Published: March 1, 2003",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451848076.001",
    "The model captures interaction between exchange rate policy, fiscal policy, and outright default on foreign-currency denominated debt.",
    "Under a credible hard peg (currency board), default is a more likely outcome even without an exceptionally large short-term debt, because devaluation is not an option.",
    "Under a conventional fixed peg, the government may optimally choose an exchange rate level that is likely to result in partial or complete debt default.",
    "Depending on the exchange rate regime, multiple equilibria can exist; one equilibrium features:",
    "Under a hard peg, there is a unique equilibrium.",
    "The exchange rate affects the supply of short-term debt facing the government.",
    "Credible hard peg removes devaluation as a policy option, altering default incentives.",
    "Fixed peg regimes allow the government discretion over the exchange rate level, potentially inducing policies that increase default likelihood.",
    "Multiple equilibria under certain exchange rate regimes:",
    "Unique equilibrium under a credible hard peg characterized by the absence of multiple self-fulfilling outcomes.",
    "Exchange rate regime choice materially affects government default risk on foreign-currency debt.",
    "Hard pegs (currency boards) can increase default probability by eliminating devaluation as an adjustment mechanism.",
    "Under fixed pegs, governments may set exchange rates that trade off exchange rate stability against higher default risk; policymakers should consider this trade-off when designing exchange rate and fiscal policies.",
    "**Exchange Rate Policy and Debt Crises in Emerging Economies - WP/03/60, corrected**"
  ],
  "related": [
    {
      "title": "Exchange Rate Policy and Debt Crises in Emerging Economies - WP/03/60, corrected",
      "role": "document",
      "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2003/_wp0360.pdf",
      "summary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2003/_wp0360.pdf.md",
        "mime": "text/markdown"
      },
      "binary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2003/_wp0360.pdf",
        "mime": "application/pdf"
      }
    }
  ],
  "alternates": {
    "markdown": "/en/publications/wp/issues/2016/12/30/exchange-rate-policy-and-debt-crises-in-emerging-economies-16382/index.md",
    "json": "/en/publications/wp/issues/2016/12/30/exchange-rate-policy-and-debt-crises-in-emerging-economies-16382/index.json",
    "bundleManifest": "/en/publications/wp/issues/2016/12/30/exchange-rate-policy-and-debt-crises-in-emerging-economies-16382/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-17T06:10:51.401Z"
}