Foreign currency debt,financial crises and economic growth: A long-run view |
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Authors: | Michael D Bordo Christopher M Meissner David Stuckler |
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Institution: | 1. Department of Economics, Rutgers University and NBER, New Jersey Hall, 75 Hamilton Street, New Brunswick, NJ 08901, United States;2. Department of Economics, University of California, Davis and NBER, One Shields Avenue, Davis, CA 95616, United States;3. Christ Church College, University of Oxford, Oxford OX1 1DP, United Kingdom |
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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 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 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 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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Keywords: | F34 F36 F43 N10 |
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