Issues in international economics: an empirical study on the sustainability, external debt and reserves management.

Abstract

This thesis consists of three essays related to balance of payment or the external sector issues. These three essays include an analysis of a country’s current account and fiscal sustainability position, the role of external debt in economic growth, and the reserves and debt management.
The main intention of the first essay (comprising Chapter 2) is to analyze the sustainability of the current account and fiscal position for high, middle and low income countries. This empirical analysis makes use of various panel unit root and cointegration tests, as well as fixed and random effects estimators. The results indicate that there is evidence of current account sustainability only for high-income countries indicating that the intertemporal budget constraints are being maintained. In contrast, the middle-income and low-income countries are found to be in an unsustainable current account position. In addition, this paper also finds that all groups of countries have a slow phase of convergence towards equilibrium which suggests that all countries are vulnerable to any sudden shock or stop. Besides that, there is evidence of sustainability on fiscal policy for the high and middle groups of countries.
Chapter 3 investigates the issue of whether external debt contributes to expansion in economic growth. This chapter attempts to answer this question by analyzing 31 developing countries over a period of 36 years (1970-2005). The results reveal that the accumulation of external debt is associated with a slowdown in the economies of the developing countries. Besides this, we find evidence that debt service ratio does not crowd out the investment rate in developing countries. In other words, even though the external debt is negatively associated with economic growth, countries are found to be safe from being in the debt overhang hypothesis. However, the negative effect could be interpreted as the main symptom of a country before it becomes involved in the debt overhang problem. In addition, fiscal balance, iii government revenue, openness, and domestic credits are found to have a positive effect on investment and, to a lesser extent, economic growth. Furthermore, there is evidence to support the existence of spatial dependence in the growth model, suggesting the existence of positive spillover effect of growth among the neighbouring countries. This suggests that countries are found to have positive correlation with their neighbours’ economic growth.
The main analytical contribution of the final chapter, which is chapter 4, is to analyze the cost of jointly holding reserves and sovereign debt decision. By analyzing the impact of holding reserves and sovereign debt on sovereign credit ratings, this provides the evidence of the costs of holding reserves and debt with respect to credit risk. As predicted by theory, the international reserves-holding is associated with good sovereign credit ratings as well as lower credit risk while the sovereign debtholding leads to a lower sovereign credit rating and high credit risk. This implies that reducing (repaying) their sovereign debts is the best decision for countries to keep and maintain a good credit risk reputation. Meanwhile, the benefit of holding reserves has crowded out the cost of holding short-term debt, resulting in a net positive effect on sovereign ratings. This could imply that a country should hold more reserves with regard to the level of short-term debt which is a highly vulnerable liability for a country. The results reveal that the adequate level of international reserves in month of imports is slightly higher than with the conventional rule which at 3 month of imports.

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ORCID for Jan M. Podivinsky: orcid.org/0000-0002-4921-1189

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