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Redemption or Abstinence? Original Sin, Currency Mismatches and Counter Cyclical Policies in the New Millennium

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Listed:
  • Hausmann Ricardo

    (Harvard University)

  • Panizza Ugo

    (UNCTAD)

Abstract

This paper updates our previous work on the level and evolution of original sin. It shows that while the number of countries that issue local-currency debt in international markets has increased in the past decade, this improvement has been quite modest. Although we find that countries have been borrowing at home, thanks to deepening domestic markets, we document that foreign participation in these markets is more limited than what is usually assumed. The paper shows that the recent decline of currency mismatches and the consequent ability to conduct countercyclical macroeconomic policies is due to lower net debt (abstinence) and not to redemption from original sin. We conclude that original sin continues to make financial globalization unattractive and developing countries have opted for abstinence because foreign currency debt is too risky. The promised paradise of financial globalization will need to wait for redemption from original sin.

Suggested Citation

  • Hausmann Ricardo & Panizza Ugo, 2011. "Redemption or Abstinence? Original Sin, Currency Mismatches and Counter Cyclical Policies in the New Millennium," Journal of Globalization and Development, De Gruyter, vol. 2(1), pages 1-35, August.
  • Handle: RePEc:bpj:globdv:v:2:y:2011:i:1:n:4
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    References listed on IDEAS

    as
    1. John D. Burger & Francis E. Warnock, 2006. "Local Currency Bond Markets," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 1-7.
    2. Ugo Panizza & Dany Jaimovich, 2007. "Procyclicality or Reverse Causality?," IDB Publications (Working Papers) 1949, Inter-American Development Bank.
    3. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. VĂ©gh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters,in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    5. 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.
    6. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    7. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-698, September.
    8. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    9. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters,in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
    10. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    11. Kevin Cowan & Eduardo Levy Yeyati & Ugo Panizza & Federico Sturzenegger, 2006. "Sovereign Debt In The Americas: New Data and Stylized Facts," Business School Working Papers 2006-09, Universidad Torcuato Di Tella.
    12. Ugo Panizza & Dany Jaimovich, 2007. "Procyclicality or Reverse Causality?," Research Department Publications 4508, Inter-American Development Bank, Research Department.
    13. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373.
    14. Mehl, Arnaud & Reynaud, Julien, 2005. "The determinants of "domestic" original sin in emerging market economies," Working Paper Series 560, European Central Bank.
    15. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(4), pages 459-472, November.
    16. Ugo Panizza, 2008. "Domestic And External Public Debt In Developing Countries," UNCTAD Discussion Papers 188, United Nations Conference on Trade and Development.
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    More about this item

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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