External Debt and Economic Vulnerability: An International Evidence

Abstract

This paper examines the influence of external debt on economic vulnerability. Using an international sample of 96 countries over the period from 1990 to 2018, we find that external debts contribute to spurring economic vulnerability. In particular, we show that a higher level of external debt is associated with a greater economic vulnerability through accelerating the scale and the likelihood of external shocks in the economy. However, this finding is only hold for long-term external debt. Short-term external debt, on the other hand, can actually reduce economic vulnerability. We further examine the distribution of external debt and find that public external debt has a negative impact on economic stability, while private external debt appears to have no apparent impact. Overall, our results have important implications for authorities responsible for ensuring the resilience of the economy.