Commodity Price Volatility, External Debt and Exchange Rate Regimes

This study explores the impact of commodity price volatility on external debt accumulation under fixed, managed and floating exchange rate regimes. We estimate dynamic panel data models for 97 countries from 1993 to 2016. Our empirical findings show that commodity price volatility increases external debt accumulation for commodity-exporting countries. This impact is three-times larger for countries with fixed exchange rate systems, compared to a managed floating exchange regime. Under floating exchange regimes, the impact of commodity price volatility on external debt is statistically insignificant. Our results suggest that the adoption of a floating exchange rate regime by commodity-exporting countries is critical to impair the effect of commodity price volatility on external debt accumulation.