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Identifying the effects of an exchange rate depreciation on country risk: Evidence from a natural experiment

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Author Info

  • Bordo, Michael D.
  • Meissner, Christopher M.
  • Weidenmier, Marc D.

Abstract

A natural experiment is used to study exchange rate depreciation and perceived sovereign risk. France suspended coinage of silver in 1876 provoking a significant exogenous depreciation of all silver standard countries versus gold standard currencies like the British pound - the currency in which their debt was payable. The evidence suggests an exchange rate depreciation can significantly increase sovereign risk if a country is exposed to foreign currency debt. We implement a difference-in-differences estimator and find that the average silver country's spread on hard currency debt increased over ten percent relative to non-silver countries.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 28 (2009)
Issue (Month): 6 (October)
Pages: 1022-1044

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Handle: RePEc:eee:jimfin:v:28:y:2009:i:6:p:1022-1044

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Foreign currency debt Bimetallism Gold standard Sovereign risk;

References

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  1. Flandreau, Marc & Sussman, Nathan, 2004. "Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century," CEPR Discussion Papers 4248, C.E.P.R. Discussion Papers.
  2. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  4. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
  5. Oppers, S.E., 1994. "Was the Worldwide Shift to Gold Inevitable? An Analysis of the End pf Bimetalism," Working Papers 351, Research Seminar in International Economics, University of Michigan.
  6. Hanson, John R, II, 1975. "Exchange-Rate Movements and Economic Development in the Late Nineteenth Century: A Critique," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 859-62, August.
  7. Friedman, Milton, 1990. "Bimetallism Revisited," Journal of Economic Perspectives, American Economic Association, vol. 4(4), pages 85-104, Fall.
  8. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 249-275, February.
  9. Nugent, Jeffrey B, 1973. "Exchange-Rate Movements and Economic Development in the Late Nineteenth Century," Journal of Political Economy, University of Chicago Press, vol. 81(5), pages 1110-35, Sept.-Oct.
  10. Flandreau, Marc, 1996. "The French Crime of 1873: An Essay on the Emergence of the International Gold Standard, 1870–1880," The Journal of Economic History, Cambridge University Press, vol. 56(04), pages 862-897, December.
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Citations

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Cited by:
  1. Wang, Alan T. & Yang, Sheng-Yung & Yang, Nien-Tzu, 2013. "Information transmission between sovereign debt CDS and other financial factors – The case of Latin America," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 586-601.
  2. Rockoff, Hugh & White, Eugene N., 2012. "Monetary Regimes and Policy on a Global Scale: The Oeuvre of Michael D. Bordo," MPRA Paper 49672, University Library of Munich, Germany, revised May 2013.
  3. Iva Petrova & Michael G Papaioannou & Dimitri Bellas, 2010. "Determinants of Emerging Market Sovereign Bond Spreads," IMF Working Papers 10/281, International Monetary Fund.

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