Working Paper: NBER ID: w15534
Authors: Michael D. Bordo; Christopher M. Meissner; David Stuckler
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 short and long run effects on output between 1880-1913 and 1973-2003 for 45 countries. Greater ratios of foreign currency debt to total debt are 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 find that financial crises, driven by exposure to foreign currency, resulted in significant permanent output losses. We evaluate our findings by looking at the risk posed by high levels of foreign currency liabilities in eastern Europe in late 2008.
Keywords: foreign currency debt; financial crises; economic growth; currency crises; debt crises
JEL Codes: F34; F36; F43; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher ratios of foreign currency debt to total debt (F34) | risk of currency and debt crises (F34) |
| strong financial systems (P34) | likelihood of crises (H12) |
| financial crises driven by foreign currency exposure (F31) | long-term economic growth (O49) |