Interest rate policy, debt sustainability and counter-
cyclical policy in a non-sovereign monetary area
Chief, Development Policy and Analysis Branch
Financing for Development Office
United Nations Department for Economic and Social Affairs
In a number of emerging market economies with substantial outstanding debt stocks it
has been argued that interest rates have an impact on both the government budget deficit
through interest costs and the external balance through the factor services balance.
Interest rate policy to fight inflation is in general meant to influence economic activity,
but if these imbalances are due not to excess domestic absorption or wages rising in
excess of productivity, traditional monetary policy may reinforce inflation. Further,
interest rates have a direct impact on debt sustainability and in certain circumstances the
impact may also be opposite of the traditional view.