A Non-Linear Currency Substitution Model of Hysteresis in Debt and Competitiveness

31 Pages Posted: 5 Nov 2006

See all articles by Saziye Gazioglu

Saziye Gazioglu

Robert Gordon University - Aberdeen Business School

W. David McCausland

University of Aberdeen - Business School

Date Written: March 2002

Abstract

The model has four assets: domestic and foreign money and bonds. It is a two country macro model, with debt defined in terms of the net asset holdings of the domestic country. Asset flows between the domestic and foreign country are driven by the interaction between the current and capital account. Both the assets and goods markets are non-linear: the non-linearities in international debt create the possibility of multiple debt and competitiveness equilibria. The paper shows that domestic and foreign monetary policy, as well as trade shocks, can not only lead to irreversibility of international debt, but also of international competitiveness. This allows us to shed some light on the causes leading to 'debt traps' faced by newly industrialised and less developed countries, the so called 'Dutch disease' in countries with new resource discoveries, and the persistent effects on trade and competitiveness with capital controls and project linked lending.

Keywords: international debt, currency substitution, hysteresis, trade, exchange rates

JEL Classification: F17, F32, F34, F40

Suggested Citation

Gazioglu, Saziye and McCausland, W. David, A Non-Linear Currency Substitution Model of Hysteresis in Debt and Competitiveness (March 2002). Available at SSRN: https://ssrn.com/abstract=942309 or http://dx.doi.org/10.2139/ssrn.942309

Saziye Gazioglu

Robert Gordon University - Aberdeen Business School ( email )

Garthdee Road
Aberdeen AB10 7QE
United Kingdom

W. David McCausland (Contact Author)

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Old Aberdeen AB24 3QY, Scotland AB24 3QY
United Kingdom

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