The impact of financial openness on public debt in developing countries

Abstract

This article studies the impact of international financial openness on the public debt-to-output ratio in a representative sample of 37 developing countries from 1970 to 2015. We find that it is important to distinguish between the financial openness in the home country and that in the rest of the world, and distinguish between the external and domestic component of public debt. Our result shows that financial openness in the home country reduces the external and total public debt. Differently, financial openness in foreign countries increases the external public debt in the home country. Further analysis shows that the effect of home country financial openness can be explained by the substitution between external public debt and alternative external financing channels of the country; the effect of foreign countries’ financial openness can be explained by the substitution between external and domestic public debt.