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130 Years of Fiscal Vulnerabilities and Currency Crashes in Advanced Economies

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  • Marcel Fratzscher
  • Arnaud Mehl
  • Isabel Vansteenkiste

Abstract

This paper investigates the empirical link between fiscal vulnerabilities and currency crashes in advanced economies over the last 130 years, building on a new data set of real effective exchange rates and fiscal balances for 21 countries since 1880. The paper finds evidence that crashes depend more on prospective fiscal deficits than on actual ones, and more on the composition of public debt (that is, rollover/sudden stop risk) than on its level. The paper also uncovers significant nonlinear effects at high levels of public debt as well as significantly negative risk premiums for major reserve currencies, which enjoy a lower probability of currency crash than other currencies ceteris paribus. Yet, the estimates indicate that such premiums remain small in size relative to the conditional probability of a currency crash if prospective fiscal deficits or rollover/sudden stop risk are high.

Suggested Citation

  • Marcel Fratzscher & Arnaud Mehl & Isabel Vansteenkiste, 2011. "130 Years of Fiscal Vulnerabilities and Currency Crashes in Advanced Economies," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(4), pages 683-716, November.
  • Handle: RePEc:pal:imfecr:v:59:y:2011:i:4:p:683-716
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    Citations

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    Cited by:

    1. Luc Laeven & Fabián Valencia, 2013. "Systemic Banking Crises Database," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(2), pages 225-270, June.
    2. Eichengreen, Barry & Livia, Chitu & Mehl, Arnaud, 2014. "Stability or upheaval? The currency composition of international reserves in the long run," Globalization and Monetary Policy Institute Working Paper 201, Federal Reserve Bank of Dallas.
    3. Chiţu, Livia & Eichengreen, Barry & Mehl, Arnaud, 2014. "When did the dollar overtake sterling as the leading international currency? Evidence from the bond markets," Journal of Development Economics, Elsevier, vol. 111(C), pages 225-245.
    4. Campbell, Douglas L., 2016. "Measurement matters: Productivity-adjusted weighted average relative price indices," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 45-81.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-472, May.
    6. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299, September.
    7. M. Ayhan Kose & Sergio Kurlat & Franziska Ohnsorge & Naotaka Sugawara, 2017. "A Cross-Country Database of Fiscal Space," Koç University-TUSIAD Economic Research Forum Working Papers 1713, Koc University-TUSIAD Economic Research Forum.
    8. Douglas L. Campbell, 2014. "Through the Looking Glass: A WARPed View of Real Exchange Rate History," Working Papers w0210, Center for Economic and Financial Research (CEFIR).
    9. Douglas Sutherland & Peter Hoeller, 2012. "Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics," OECD Economics Department Working Papers 1006, OECD Publishing.
    10. Yanping Zhao & Jakob Haan & Bert Scholtens & Haizhen Yang, 2014. "Sudden Stops and Currency Crashes," Review of International Economics, Wiley Blackwell, vol. 22(4), pages 660-685, September.

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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