However, if the natural resources' prices begin to fall, and if the real exchange rate falls, a government would have less money with which to pay a more expensive debt.
For example, facing a sharp increase in real exchange rate volatility and the increased risk in these years, institutions surrounding international finance worked together to address these challenges.
This is contrary to economic theory which predicts that with full risk sharing, relative consumption should be perfectly correlated with the real exchange rate.
This model can account for real exchange rate volatility, but does not say anything about the volatility of relative to output or the persistence of the real exchange rate movements.
Internal as well as external shocks to the real exchange rate and/or real effective rate can produce similarly disruptive balance sheet effects, with economy-wide implications for liquidity.