Tesis

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Tesis de Maestría en Economía Internacional

El efecto del tipo de cambio real en la solvencia fiscal

Gabriela Romaniello

Tutor: Umberto Della Mea

Fecha defensa: 19 diciembre 2008 Tribunal: Ariel Davrieux, Gerardo Licandro, Andrés Masoller, Umberto Della Mea

Real Exchange Rate and Fiscal Outcomes: A Flow Approach

Gabriela Romaniello

Tutor: Dr. Umberto Della Mea

1 ACKNOWLEDGEMENTS:

I would like to thank Graciela Ceruti (accountant) and Ina Tiscordio (economist) for their technical support and intellectual generosity.

I would also like to thank the economic statistics department of the Central Bank of Uruguay for allowing me to access information without which this study would not have been possible.

And special thanks to my tutor, Dr Umberto Della Mea,for his support, comments and commitment throughout the process of producing this thesis.

Finally I would like to be grateful to the examining board integrated by Professor Ariel Davrieux, Dr Andrés Masoller and Dr Gerardo Licandro for their invaluable comments.

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I.INTRODUCTION...........................................................................................................................5

II.

THE MODEL. .................................................................................................................................8

III.

ANALYZING THE URUGUAYAN EVIDENCE ................................................................14

III.1 EXCHANGE RATE AND PUBLIC DEBT EVOLUTION ..............................................................14 III.2III.3 EXCHANGE RATE AND THE FISCAL PRIMARY RESULT.....................................................17 EXCHANGE RATE, DEBT INTEREST AND RELATIVE PRICES ...........................................32

IV.

CONCLUSIONS .......................................................................................................................33

BIBLIOGRAPHY...................................................................................................................................35

METHODOLOGICAL ANNEX ...........................................................................................................39

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Real Exchange Rate and Fiscal Outcomes: A Flow Approach

Abstract Against the usual idea based on the consequences of pubic debt dollarization, in this study weput forward the concept that real depreciation may also have a positive fiscal impact, provided that revenues are relatively more based on tradable goods and services while expenditures are relatively biased towards non-tradables. Analyzing the Uruguayan experience, we show that this relative price effect is far from negligible and has indeed provided a source of extra income in situations wheresovereign financing is highly restricted.

During the 2002-2003 economic crises, public debt sustainability indicators deteriorated following an overshooting in the real exchange rate and the subsequent impact on the dollarized portion of the debt. However, the Uruguayan government was able to run a primary surplus, in part because it benefited from this favorable relative price evolution. Insome cases, the amount of this transfer can be estimated as sufficient to cover most of the interest due on public debt.

KEYWORDS: Fiscal Sustainability, Real Exchange Rate, Fiscal Balance.

JEL Classification: E65, H62, H69.

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I.

Introduction.

In this study we explore the idea, in a standard tradable/nontradable context, that a real depreciation may have a significant positiveeffect on the government’s primary result. Even in a dollarized economy, where public debt is at least partially foreign currency denominated, this effect may compensate for the increased burden of debt service, and thus help to meet increased interest payments at times when external and domestic financing is restricted.

The

channel

whereby

real

depreciation

may

lead

to...
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