TY  - JOUR
AU  - Eichengreen,Barry
AU  - Hausmann,Ricardo
TI  - Exchange Rates and Financial Fragility
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7418
PY  - 1999
Y2  - November 1999
UR  - http://www.nber.org/papers/w7418
L1  - http://www.nber.org/papers/w7418.pdf
N1  - Author contact info:
Barry Eichengreen
Department of Economics
University of California, Berkeley
549 Evans Hall 3880
Berkeley, CA 94720-3880
Tel: 510/642-2772
Fax: 510/643-0926
E-Mail: eichengr@econ.Berkeley.edu

Ricardo Hausman
Harvard Kennedy School
79 JFK St.
Cambridge
MA
02138
Tel: 617-496-3740
E-Mail: ricardo_hausmann@harvard.edu
AB  - In this paper we analyze three views of the relationship between the exchange rate and financial fragility: (1) the moral hazard hypothesis, according to which pegged exchange rates offer implicit insurance against exchange risk and thereby encourage reckless borrowing and lending; (2) the original sin hypothesis, which emphasizes an incompleteness in financial markets which prevents the domestic currency from being used to borrow abroad or to borrow long term even domestically; and (3) the commitment problem hypothesis, which sees financial crises as resulting from neither moral hazard nor original sin but from the weakness of the institutions that address commitment problems.   We examine the evidence on these hypotheses and draw out their implications for exchange-rate policy in emerging markets.
ER  -