Original Sin and the Great Depression

Michael Bordo and Christopher Meissner

No 27067, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Was foreign currency denominated debt a determinant of exchange rate and monetary policy during the Great Depression? Policy makers of the day thought so. High-frequency bond price data show depreciation was associated with elevated risk premia on public debt. We also show that foreign currency debt was a determinant of exchange rate policy during the Great Depression. The gold standard heightened exposure to global shocks and prolonged the Great Depression. Why then did countries hesitate to jettison the monetary technology? Multiple factors have been identified in the literature ranging from economic and political considerations to social preferences for monetary stability. We find that foreign currency debt and trade patterns, both shaped by history and geography, had a significant impact on these choices and hence on economic stability. The effect is likely to be about half as large as the output gap in determining exchange rate policy.

JEL-codes: F31 F34 N10 N2 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-cba, nep-gen, nep-his and nep-mon
Note: DAE IFM ME
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Published as Michael D. Bordo & Christopher M. Meissner, 2023. "Original sin and the great depression," Journal of International Economics, .

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