International Monetary Economics

Paper Summary:

This paper investigates the role of currency overvaluation in a model of foreign debt using the panel data of 80 countries during the period of 1990 - 1999. The paper shows that there is a significant effect of currency overvaluation on the level of debt. In addition, by using the Granger causality test, the paper shows that both the level of debt and currency overvaluation are mutually causative to each other. The paper makes extensive use of graphs and figures.

From the Paper:

"Table 5 shows that most F-statistics are large and the probability values are close to 0. Thus, we can reject the null hypothesis, suggesting that the level of debt and currency overvaluation has a mutual effect on each other. By lagging period 1, there is only significant effect of overvaluation on debt, which means that capital inflow lead to currency appreciation, while the currency appreciation does not granger cause the level of debt. However, if we extended the lag 2 and lag 6, both level of debt and currency overvaluation have mutual causative to each other. The degree of effect of debt on currency appreciation is much larger than that of currency appreciation on debt accumulation, suggesting that there is much stronger causality of capital flow to currency appreciation.

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