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

49 Pages Posted: 24 Nov 2009 Last revised: 13 Jun 2021

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Christopher M. Meissner

University of California, Davis

David Stuckler

University of Cambridge - Faculty of Human, Social, and Political Science

Date Written: November 2009

Abstract

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.

Suggested Citation

Bordo, Michael D. and Meissner, Christopher M. and Stuckler, David, Foreign Currency Debt, Financial Crises and Economic Growth: A Long Run View (November 2009). NBER Working Paper No. w15534, Available at SSRN: https://ssrn.com/abstract=1510524

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher M. Meissner

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

David Stuckler

University of Cambridge - Faculty of Human, Social, and Political Science ( email )

Cambridge, CB3 9DD
United Kingdom

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