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

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  • Chris Meissner
  • Michael Bordo
  • David Stuckler

    (Department of Economics, University of California Davis)

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 effects on short-term growth and long-run output effects in both 1880-1913 and 1973-2003 for 45 countries. Greater ratios of foreign currency debt to total debt is 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 found that financial crises, driven by exposure to foreign currency, resulted in significant permanent output losses. We estimate some implications of our findings for the risks posed by currently high levels of foreign currency liabilities in eastern Europe.

Suggested Citation

  • Chris Meissner & Michael Bordo & David Stuckler, 2009. "Foreign Currency Debt, Financial Crises and Economic Growth: A Long Run View," Working Papers 291, University of California, Davis, Department of Economics.
    • Handle: RePEc:cda:wpaper:291
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    More about this item

    Keywords

    foreign currency debt; currency crises; sudden stops; financial development;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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