External Debt and International Trade: Another Mismatch

Abstract

Currency mismatch makes a debtor country suffer from domestic depreciation by magnifying the burden of its external debt. Because external debt can be repaid by exporting more than importing, a crucial channel for inducing recovery is net exports. However, the argument that domestic depreciation correspondingly boosts net exports is not warranted if currency compositions differ substantially between debt and trade. This study examines the association between the debt revaluation and trade competitiveness gain effects of exchange rate fluctuations for middle- and low-income countries. The empirical results suggest that currency-compositional discord between debt and trade has significant welfare implications.