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External Debt and Currency Crisis: A Global Perspective
By:Liumin Chen
Published on 2019 by

The history of financial crisis since the 1980s tells us that a high level of external debt usually makes countries more vulnerable to capital outflows and exchange rate fluctuations. This thesis uses a mixed-effect logit model to study the nonlinear impact of external debt on the possibility of a currency crisis happening in emerging market economies, as well as factors that strengthen or attenuate the relationship. It seeks to provide guidance for policymaking in emerging markets external debt management. The analysis is based on a panel data set of 46 developing countries over the time period from 1990 to 2015. Sources of data include the World Bank and the IMF Open Data, and the Polity IV Project conducted by the Center for Systemic Peace. We find countries who have borrowed excessively in foreign currency are more prone to currency crisis risks. A strong economy (such as a higher GDP per capita) and sufficient foreign reserves help countries to be more resilient against currency crises. In terms of external factors, currency risks are particularly high during times when the US Federal Reserve sets the interest rate high.

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