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Original Sin Mystery Trinity and Unequal Blessings

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  • Deniz Arinsoy

    ()
    (Undersecretariat of the Turkish Treasury)

  • Erdal Özmen

    ()
    (Department of Economics, METU)

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    Abstract

    We investigate whether the fact that most countries cannot borrow internationally in their own currencies, referred to as “original sin” by Eichengreen and Hausmann (1999), may remain as a “mystery” when an alternative variable set and estimation procedure are taken into account. Our results suggest that flexible exchange rates and strong macroeconomic policy stance with sound institutions are necessary but not sufficient for redemption from original sin. Original sin appears to be persistent and determined also by the variables which are beyond the sole control of individual countries. Consequently, redemption from it and satisfying the blessed trinity of international currency, flexible exchange rates and sound institutions requires a new international financial system allowing complete markets for all currencies meeting the necessary conditions.

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    File URL: http://www.erc.metu.edu.tr/menu/series04/0415.pdf
    File Function: First version, 2004
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    Bibliographic Info

    Paper provided by ERC - Economic Research Center, Middle East Technical University in its series ERC Working Papers with number 0415.

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    Length: 16 pages
    Date of creation: Oct 2004
    Date of revision: Oct 2004
    Handle: RePEc:met:wpaper:0415

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    Related research

    Keywords: Currency mismatches; Exchange rate regimes; International financial architecture; Original sin; Rule of law;

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    References

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    1. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
    2. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
    3. Obstfeld, Maurice, 2004. "Globalization, Macroeconomic Performance, and the Exchange Rates of Emerging Economies," Center for International and Development Economics Research, Working Paper Series qt7q670769, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    4. Ronald McKinnon & Gunther Schnabl, 2004. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Review of Development Economics, Wiley Blackwell, vol. 8(3), pages 331-360, 08.
    5. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
    6. repec:rus:hseeco:181565 is not listed on IDEAS
    7. Augusto de la Torre & Eduardo Levy Yeyati & Sergio L. Schmukler, 2002. "Financial globalization: Unequal blessings," Business School Working Papers veintinueve, Universidad Torcuato Di Tella.
    8. repec:rus:hseeco:123922 is not listed on IDEAS
    9. McKinnon, Ronald I., 2004. "The East Asian dollar standard," China Economic Review, Elsevier, vol. 15(3), pages 325-330.
    10. William Greene, 1998. "Marginal Effects in the Censored Regression Model," Working Papers 98-05, New York University, Leonard N. Stern School of Business, Department of Economics.
    11. Hausmann, Ricardo & Panizza, Ugo, 2003. "On the determinants of Original Sin: an empirical investigation," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 957-990, December.
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