Working Paper: NBER ID: w1336
Authors: Rudiger Dornbusch
Abstract: The paper investigates the sources of debt and debt difficulties for a group of Latin American countries. It is argued that external shocks -- oil, interest rates, world recession and the fall in real commodity prices -- cannot account by themselves for the problems. Budget deficits that accommodate terms of trade deterioration and disequilibrium exchange rates are central to a complete explanation. The paper documents that in Chile an extreme currency overvaluation led to a massive shift into imported consumer durables while in Argentina overvaluation in conjunction with financial instability led to large-scale capital flight. In the case of Brazil the budget deficit is the explanation for the growth in external indebtedness.The difference in the experience of the three countries reflects the difference in their openness to the world economy.
Keywords: external debt; budget deficits; exchange rates; Latin America; capital flight
JEL Codes: F34; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| External shocks (oil prices, interest rates) (E39) | Budget deficits (H62) |
| Budget deficits (H62) | External debt (F34) |
| Disequilibrium exchange rates (F31) | External debt (F34) |
| Currency overvaluation in Chile (F31) | Shift into imported consumer durables (L68) |
| Shift into imported consumer durables (L68) | Current account deficit (F32) |
| Currency overvaluation and financial instability in Argentina (F31) | Capital flight (F21) |
| Capital flight (F21) | Growth of external debt (F34) |
| Budget deficit in Brazil (H68) | Growth in external indebtedness (F34) |