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

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  • 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.

Suggested Citation

  • Bordo, Michael D. & Meissner, Christopher M. & Weidenmier, Marc D., 2009. "Identifying the effects of an exchange rate depreciation on country risk: Evidence from a natural experiment," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 1022-1044, October.
  • Handle: RePEc:eee:jimfin:v:28:y:2009:i:6:p:1022-1044
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    10. Michael D. Bordo & Christopher Meissner & Angela Redish, 2003. "How "Original Sin" was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions," NBER Working Papers 9841, National Bureau of Economic Research, Inc.
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    Cited by:

    1. repec:krk:eberjl:v:1:y:2013:i:3:p:21-33 is not listed on IDEAS
    2. 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.
    3. Iva Petrova & Michael G. Papaioannou & Dimitri Bellas, 2010. "Determinants of Emerging Market Sovereign Bond Spreads; Fundamentals vs Financial Stress," IMF Working Papers 10/281, International Monetary Fund.
    4. 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.
    5. Fernholz, Ricardo T. & Mitchener, Kris James & Weidenmier, Marc, 2017. "Pulling up the tarnished anchor: The end of silver as a global unit of account," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 209-228.

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