Twin deficits - High foreign debt - devaluation of local currency

[archived_user]

Curriculum R16, p71
[question removed by moderator]
If foreign debt is too high, and then devaluate the local currecny. Doesn’t it make the problem even worse?

 

[archived_user]

Yes, even worse. Twin deficit eventually result in devaluation of local currency.

 

[archived_user]

sorry, anyone can help as Im confused why the local currency has to be devalued?

 

[archived_user]

Devaluation of the currency means a smaller balance of payment on a fiscal deficit.
Think about it. If you want to stop spending money abroad, and make your goods more attractive, then your currency has to be priced lower, This scales back on the “borrowing” part, and eventually repays off the foreign debt when the CA turns to a surplus.

 

[archived_user]

Thank you!