Arturo C. Porzecanski

The inflationary impact of repetitive devaluation

It is suggested that in countries which have sustained a significant inflationary condition and, as a consequence, have frequently changed their foreign‐exchange rate, price expectations may be developed on the basis of these changes. In order to examine this hypothesis a macroeconomic model is built and econometric tests are undertaken using quarterly data for Brazil, Chile, and Uruguay. The author warns that since repetitive devaluation‐type policies can fuel price expectations, they may only lead to increased domestic inflationary pressures, balance of trade deficits, and further rounds of devaluation.

Debunking the Relevance of the Debt-to-GDP Ratio

Historical experience does not confirm the simplistic notion that the heavier the burden of the public debt relative to GDP, the greater is the risk that governments will encounter debt-servicing difficulties. In 25 government defaults that occurred during 1998-2017, the pre-default debt-to-GDP ratios ranged from a very low of 27% (Ecuador in 2008) to a very high of 236% (Nicaragua in 2003), with a sample median of 79%. As ratios of government debt rise, some societies manage to deliver more responsible fiscal behaviour. Low debt ratios, on the other hand, often mask dangerous currency or maturity mismatches, as well as contingent liabilities, capable of suddenly impairing banks and governments. The demand for government bonds can behave unpredictably, and governments with low or high debt ratios can suddenly find themselves cut off from needed financing. Official institutions like the IMF, European Commission, and World Bank have done themselves and their member states a great disfavour by obsessing about debt ratios which do not predict fiscal outcomes.