THE EFFECT OF FOREIGN DEBT ON CURRENCY VALUES

Despite the publicity surrounding the external debts of the less devel oped countries (LDCs), the effects of those debts on the exchange rate s has not received much attention in the literature. This paper propos es a structural model that is a synthesis of an asset and a monetary m odel of exchange rates along the line of Frankel (1983), and modified to include external debt. Estimating this model for a sample of 18 LDC s shows that debt, in addition to the usual variables such as money su pply and interest rates, has a largely significant and negative impact on the external values of most of the countries' currencies.