Balance of Payments and Economic Policy in Developing Economies

The concept of policy space, especially fiscal space, has become increasingly important as policymakers strive to balance the need for increased public investment with concerns about debt sustainability. However, there is still no consensus on the definitions of policy space and external sustainability.

A new working paper by Nathalie Marins seeks to contribute to this discussion by examining external debt sustainability and economic policy space through a structuralist lens. First, it expands the balance of payments constraint approach to include different types of creditors and currencies on developing economies’ external liabilities and the effect of changes in external financing conditions for debt sustainability. Second, it analyzes how these liabilities impact the options and constraints for monetary and fiscal policies.

Overall, this paper advocates for reassessing conventional debt management and economic policy approaches in developing economies and emphasizes the necessity for context-specific strategies that account for the complex interplay between debt composition, external constraints and domestic policy objectives.