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

  • Michael Bordo
  • David Stuckler
  • Chris Meissner

    (Department of Economics, University of California Davis)

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.

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Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 921.

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Length: 48
Date of creation: 19 Oct 2009
Date of revision:
Handle: RePEc:cda:wpaper:09-21
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