External debt and international trade : another mismatch

Currency mismatch makes a debtor country suffer from domestic depreciation by magnifying the burden of its external debt. Since external debt can be paid back by exporting more than importing, a crucial channel for inducing recovery is net export. It is not warranted, however, that domestic depreciation will boost net export correspondingly if the currency compositions differ substantially between debt and trade. This paper examines the association between the debt revaluation and trade competitiveness gain effects of exchange rate fluctuations for middle and low income countries. Empirical results suggest that currency-compositional discord between debt and trade has significant welfare implications.