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The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997

Christopher Meissner () and Michael Bordo ()

No 1, WEF Working Papers from ESRC World Economy and Finance Research Programme, Birkbeck, University of London

Abstract: We show that exposure to foreign currency debt does not necessarily increase the risk of having a financial crisis. Some countries do not suffer from financial fragility despite original sin. Before 1913 British offshoots and Scandinavia afflicted with it avoided financial meltdowns. Today many advanced countries have original sin but few have had crises. In both periods, aggregate balance sheet mismatches are associated with a greater likelihood of a crisis. The evidence suggests that foreign currency debt is dangerous when mis-managed. This is part of the difference between developed countries and emerging markets both of which borrow in foreign currency.

Keywords: Original Sin; currency mismatch; crisis; debt intolerance; balance sheets (search for similar items in EconPapers)
JEL-codes: E44 F10 F34 N20 (search for similar items in EconPapers)
Date: 2006-03
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Working Paper: The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997 (2005) Downloads
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