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The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997

Author

Listed:
  • Christopher M Meissner

    (University of Cambridge)

  • Michael D Bordo

    (Rutgers University)

Abstract

We show that exposure to foreign currency debt does not necessarily increase the risk of having a financial crisis. Some countries do not suffer from financial fragility despite original sin. Before 1913 British offshoots and Scandinavia afflicted with it avoided financial meltdowns. Today many advanced countries have original sin but few have had crises. In both periods, aggregate balance sheet mismatches are associated with a greater likelihood of a crisis. The evidence suggests that foreign currency debt is dangerous when mis-managed. This is part of the difference between developed countries and emerging markets both of which borrow in foreign currency.

Suggested Citation

  • Christopher M Meissner & Michael D Bordo, 2006. "The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997," WEF Working Papers 0001, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
    • Handle: RePEc:wef:wpaper:0001
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Original Sin; currency mismatch; crisis; debt intolerance; balance sheets;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F10 - International Economics - - Trade - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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