Debt Buildup and Currency Vulnerability: Evidence from Global Markets

28 Pages Posted: 26 Jan 2021

See all articles by Donghyun Park

Donghyun Park

Asian Development Bank - Economic Research

Arief Ramayandi

Asian Development Bank - Economic Research

Grace Tian

Asian Development Bank

Date Written: October 20, 2020

Abstract

In this study, we examine how public and private debt buildup is related to currency depreciation pressure. Our empirical analysis of a panel dataset of 59 advanced and emerging markets reveals that both private and public debt exacerbate currency vulnerability. However, the evidence of a significant effect on currency depreciation pressure is more robust and consistent for private debt than public debt. Furthermore, we find that excessive private debt buildup can be particularly harmful in emerging markets. In addition, our evidence suggests that 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 which monitors both public and private debt buildup, especially in emerging markets.

Keywords: currency stress, exchange rate, financial vulnerability, private debt, public debt

JEL Classification: E44, E50, F31, G15

Suggested Citation

Park, Donghyun and Ramayandi, Arief and Tian, Shu, Debt Buildup and Currency Vulnerability: Evidence from Global Markets (October 20, 2020). Asian Development Bank Economics Working Paper Series No. 623, Available at SSRN: https://ssrn.com/abstract=3773556 or http://dx.doi.org/10.2139/ssrn.3773556

Donghyun Park

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Arief Ramayandi (Contact Author)

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Shu Tian

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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