Abstract
The optimal level of debt for an economic entity is a function of, among other things, the variability of its cash flows. Since real and inflationary shocks which cause the variability may not influence various components of the cash flows by equal proportions, a project's financial risk, and hence its debt capacity, will depend upon the correlation between its cash inflows and outflows. A developing country's external debt capacity depends upon cash flows arising from its foreign trade. In this research, we analyze the impact of inflation on the foreign currency cash flows of developing countries and find that inflation affects very few countries in a symmetrical manner. Results indicate that an assumption that unexpected inflation has a neutral impact on the debt capacity of a borrower is supportable neither in theory nor in practice.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.