Currency Mismatches, Default Risk, and Exchange Rate Depreciation: Evidence from the End of Bimetallism

53 Pages Posted: 29 Sep 2006 Last revised: 11 Aug 2010

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Christopher M. Meissner

University of Cambridge - Faculty of Economics and Politics; National Bureau of Economic Research (NBER)

Marc Weidenmier

Claremont McKenna College - Robert Day School of Economics and Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2006

Abstract

It is generally very difficult to measure the effects of a currency depreciation on a country%u2019s balance sheet and financing costs given the endogenous properties of the exchange rate. History provides at least one natural experiment to test whether an exogenous exchange rate depreciation can be contractionary (via an increased real debt burden) or expansionary (via an improved current account). France%u2019s decision to suspend the free coinage of silver in 1876 played a paramount role in causing a large exogenous depreciation of the nominal exchange rates of all silver standard countries versus gold-backed currencies such as the British pound%u2014the currency in which much of their debt was payable. Our identifying assumption is that France%u2019s decision to end bimetallism was exogenous from the viewpoint of countries on the silver standard. To deal with heterogeneity we implement a difference in differences estimator. Sovereign yield spreads for countries on the silver standard increased in proportion to the potential currency mismatch. Yield spreads for silver countries increased ten to fifteen percent in the wake of the depreciation. Basic growth models suggest that the accompanying reduction in investment could have decreased output per capita by between one and four percent relative to the pre-shock trajectory. This also illustrates that a substantial proportion of the decrease in spreads gold standard countries identified in the %u201CGood Housekeeping%u201D literature could be attributable to the increase in exchange rate stability. Finally, if emerging markets are going to embrace international capital flows, the most export oriented countries will manage to mitigate the negative effects of a currency mismatch.

Suggested Citation

Bordo, Michael D. and Meissner, Christopher M. and Weidenmier, Marc D., Currency Mismatches, Default Risk, and Exchange Rate Depreciation: Evidence from the End of Bimetallism (June 2006). NBER Working Paper No. w12299. Available at SSRN: https://ssrn.com/abstract=908538

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher M. Meissner

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

HOME PAGE: http://www.econ.cam.ac.uk/faculty/meissner/index.htm

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Marc D. Weidenmier

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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