AUTHOR: Ashima Goyal, Rajeswari Sengupta and Akhilesh Verma
TITLE: External Debt Financing and Macroeconomic Instability in Emerging Market Economies
We study the relationship between external debt financing and risk to macroeconomic stability using a panel vector autoregression model for a sample of ten major emerging market economies. We also focus on the linkages of key channels of external debt financing, namely external debt securities and cross-border loans. We find that external debt securities substantially impact the yield spread and the exchange rate for emerging market economies, both before and after the global financial crisis of 2008. On the other hand, the impact of cross-border flows is found to be relatively subdued for these economies in the post-crisis period. We also find that emerging economies that were already receiving a high level of external debt securities inflows experienced a relatively larger yield compression and greater exchange rate pressure compared to the economies that had a low level of external debt securities flows. It indicates higher risk exposure for EMEs with larger external debt securities flows.
Keywords: External debt securities, cross border loans, financial stability risk, panel VAR.
JEL Code: E44, E51, F34, F62, F65, G15