DEBT FLOWS AND THE VARIABILITY OF FOREIGN EXCHANGE RATES OF THE THIRTEEN LARGEST DEBTOR NATIONS
M. RAQUIBUZ ZAMAN, ABRAHAM MULUGETTA, AND SANDEEP TALWANI
Most of the theoretical discourses on the variability of exchange rates in recent years have been based on the Keynesian "asset-view" of the exchange rate as first expounded by Dornbusch1 and then modified by Frankel, 2 Branston, 3 and Dornbusch4 to synthesize the monetarist and Keynesian traditions. The synthetic models incorporate not only the variables like the relative rates of inflation and rates of growth in money supply used by the monetarists, but also include Keynesian variables, such as income and current account balance. Further, allowances are made for risk-return relationships in international portfolios of diverse currencies and the interest rate differentials between countries. 5 However, most of the studies related to these theories are about the developed economies of the West, namely, the North American and the West European countries, or at best, the OECD countries.
The studies related to the developing countries centered around the determinants of current account balances; effects of external shocks, such as escalating oil prices, sharp rises in interest rates, and the slow-down in the economies of the industrial world in the 1980s; 6 or the effects of domestic monetary and fiscal policies along with the stabilization policies. 7 These studies do not address in particular the main focus of this chapter, that is, whether or not the variability in the exchange rates of the major debtor nations can be explained in terms of the variations in the flows of debt disbursements and/or debt servicing costs. Further, hardly any effort has been made to study the causes of the exchange rate variabilities of the major debtor nations as a group for the period 1970-1984. 8
This chapter contains the results of a preliminary attempt to fill this void. It aims to test the hypothesis that the size of the flow of external borrowings