Exchange Rates and Financial Fragility

56 Pages Posted: 7 Aug 2012 Last revised: 10 Apr 2022

See all articles by Barry Eichengreen

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Ricardo Hausmann

Harvard University - Harvard Kennedy School (HKS)

Date Written: November 1999

Abstract

In this paper we analyze three views of the relationship between the exchange rate and financial fragility: (1) the moral hazard hypothesis, according to which pegged exchange rates offer implicit insurance against exchange risk and thereby encourage reckless borrowing and lending; (2) the original sin hypothesis, which emphasizes an incompleteness in financial markets which prevents the domestic currency from being used to borrow abroad or to borrow long term even domestically; and (3) the commitment problem hypothesis, which sees financial crises as resulting from neither moral hazard nor original sin but from the weakness of the institutions that address commitment problems. We examine the evidence on these hypotheses and draw out their implications for exchange-rate policy in emerging markets.

Suggested Citation

Eichengreen, Barry and Hausmann, Ricardo, Exchange Rates and Financial Fragility (November 1999). NBER Working Paper No. w7418, Available at SSRN: https://ssrn.com/abstract=196288

Barry Eichengreen (Contact Author)

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Ricardo Hausmann

Harvard University - Harvard Kennedy School (HKS) ( email )

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HOME PAGE: http://www.hks.harvard.edu/about/faculty-staff-directory/ricardo-hausmann

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