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Below Ground Exterior Wall Damaging Drywall

One corner of the 1st floor of our house is below ground level. This has caused water damage to all the wall coverings in the rooms in this corner, which include dry wall, cement & lathe/plaster. Currently, we are replacing a section of drywall. The question is what to replace it with and what, if anything, to put behind it. I have been told that cement board might be one option. Also, I've heard about something called "blue board". Should we put some sort of moisture barrier behind it? Also, since this is an exterior wall, we'd like to put in some insulation while we have it torn apart. What will prevent the moisture build up the best? Thanks!

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