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Financial Crises, 1880-1913: The Role of Foreign Currency Debt

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  • Michael Bordo
  • Christopher Meissner

Abstract

What is the role of foreign currency debt in precipitating financial crises? In this paper we assemble data for nearly 30 countries between 1880 and 1913 and examine debt crises, currency crises, banking crises and twin crises. We pay special attention to the role of foreign currency and gold clause debt, currency mismatches and debt intolerance. We find fairly robust evidence that more foreign currency debt leads to a higher chance of having a debt crisis or a banking crisis. However, a key finding is that countries with noticeably different backgrounds, and strong institutions such as Australia, Canada, New Zealand, Norway, and the US deftly managed their exposure to hard currency debt, generally avoided having too many crises and never had severe financial meltdowns. Moreover, a strong reserve position matched up to hard currency liabilities seems to be correlated with a lower likelihood of a debt crisis, currency crisis or a banking crisis. This strengthens the evidence for the hypothesis that foreign currency debt is dangerous when mis-managed. We also see that countries with previous default histories seem prone to debt crises even at seemingly low debt to revenue ratios. Finally we discuss the robustness of these results to local idiosyncrasies and the implications from this representative historical sample.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11173.

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Date of creation: Mar 2005
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Handle: RePEc:nbr:nberwo:11173

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References

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  1. Bordo, Michael D & Flandreau, Marc, 2001. "Core, Periphery, Exchange Rate Regimes and Globalization," CEPR Discussion Papers 3077, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Bordo, Michael D. & Meissner, Christopher M. & Stuckler, David, 2010. "Foreign currency debt, financial crises and economic growth: A long-run view," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 642-665, June.
  2. Michael D. Bordo & David Hargreaves & Mizuho Kida, 2010. "Global shocks, economic growth and financial crises: 120 years of New Zealand experience," NBER Working Papers 16027, National Bureau of Economic Research, Inc.
  3. Chee-Keong Choong, 2012. "Does domestic financial development enhance the linkages between foreign direct investment and economic growth?," Empirical Economics, Springer, vol. 42(3), pages 819-834, June.
  4. Michael D. Bordo, 2006. "Sudden Stops, Financial Crises, and Original Sin in Emerging Countries: Déjà vu?," NBER Working Papers 12393, National Bureau of Economic Research, Inc.
  5. Meissner, Christopher M & Taylor, Alan M, 2006. "Losing our Marbles in the New Century? The Great Rebalancing in Historical Perspective," CEPR Discussion Papers 5917, C.E.P.R. Discussion Papers.
  6. 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.
  7. Chiţu, Livia, 2012. "Was unofficial dollarisation/euroisation an amplifier of the 'Great Recession' of 2007-09 in emerging economies," Working Paper Series 1473, European Central Bank.
  8. Filippo Cesarano & Giulio Cifarelli & Gianni Toniolo, 2009. "Exchange Rate Regimes and Reserve Policy on the Periphery: The Italian Lira 1883-1911," Working Papers - Economics wp2009_11.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  9. Filippo Cesarano & Giulio Cifarelli & Gianni Toniolo, 2012. "Exchange Rate Regimes and Reserve Policy: The Italian Lira, 1883–1911," Open Economies Review, Springer, vol. 23(2), pages 253-275, April.
  10. Bordo, Michael D. & Cavallo, Alberto F. & Meissner, Christopher M., 2010. "Sudden stops: Determinants and output effects in the first era of globalization, 1880-1913," Journal of Development Economics, Elsevier, vol. 91(2), pages 227-241, March.

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