NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Foreign Currency Debt, Financial Crises and Economic Growth: A Long Run View

Michael D. Bordo, Christopher M. Meissner, David Stuckler

NBER Working Paper No. 15534
Issued in November 2009
NBER Program(s):International Finance and Macroeconomics, Monetary Economics

Foreign currency debt is widely believed to increase risks of financial crisis, especially after being implicated as a cause of the East Asian crisis in the late 1990s. In this paper, we study the effects of foreign currency debt on currency and debt crises and its indirect short and long run effects on output between 1880-1913 and 1973-2003 for 45 countries. Greater ratios of foreign currency debt to total debt are associated with increased risks of currency and debt crises, although the strength of the association depends crucially on the size of a country's reserve base and its policy credibility. We find that financial crises, driven by exposure to foreign currency, resulted in significant permanent output losses. We evaluate our findings by looking at the risk posed by high levels of foreign currency liabilities in eastern Europe in late 2008.

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Document Object Identifier (DOI): 10.3386/w15534

Published: Bordo, Michael D. & Meissner, Christopher M. & Stuckler, David, 2010. "Foreign currency debt, financial crises and economic growth: A long-run view," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 642-665, June. citation courtesy of

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