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

Michael Bordo (), Christopher Meissner () and Marc D. Weidenmier

Journal of International Money and Finance, 2009, vol. 28, issue 6, 1022-1044

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.

Keywords: Foreign; currency; debt; Bimetallism; Gold; standard; Sovereign; risk (search for similar items in EconPapers)
Date: 2009
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Handle: RePEc:eee:jimfin:v:28:y:2009:i:6:p:1022-1044