The global financial cycle and external debt: effects on growth and distribution in emerging and developing economies

BORTZ PABLO GABRIEL; MICHELENA GABRIEL; TOLEDO FERNANDO CESAR

JOURNAL OF POST KEYNESIAN ECONOMICS

Taylor and Francis

Año: 2022 vol. 45 p. 476 - 502

0160-3477

The global financial cycle (GFCy), driven by international monetaryconditions and global risk perceptions, is a major driverof capital flows to and out of emerging and developingeconomies (EDEs), reflected in external indebtedness. Thispaper analyzes the impact of the GFCy on the economic performanceof EDEs borrowing in international markets. Risingexternal borrowing generates appreciating pressures on theexchange rate and lowers the cost of external borrowing. Theoverall impact of these reinforcing effects acts over investment,debt servicing and the current account balance. Weconduct simulation exercises which show that rising externaldebt coupled with lax external financial conditions have a detrimentalimpact on economic activity and creates inflationarypressures through the effect of financial costs and the reactionof nominal wage demands. We show that capital controlmeasures increase the degrees of freedom of monetaryauthorities.