IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Good Housekeeping? Reputation, Fixed Exchange Rates, and the 'Original Sin' Problem

  • Kang Yong Tan
  • Prasanna Gai

This paper examines how the choice of exchange rate regime can signal financial rectitude and, in so doing, influcence a country's ability to borrow internationally in domestic currency. We develop a model in which the constant probability of a 'type change' creates incentives for disciplined policymakers to fix the exchange rate in an effort to separate themselves from more opportunistic types. Because the track record of a policymaker is imperfectly observable, reputational incentives depend on the past behaviour of previous generations and there is hysterisis in the updating behaviour of creditors. 'Original Sin' - the inflationary track record of one's predecessors - can reverberate over time leading creditors to be wary about extending sovereign loans in domestic currency terms. Our findings seem consistent with the pattern of the currency composition of debt in Japan and Russia at the turn of the nineteenth century.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 446.

in new window

Date of creation: 11 Aug 2004
Date of revision:
Handle: RePEc:ecm:feam04:446
Contact details of provider: Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. D. Backus & J. Driffil, 1998. "Inflation and Reputation," Levine's Working Paper Archive 625, David K. Levine.
  2. Michael D. Bordo, 1995. "The Gold Standard as a `Good Housekeeping Seal of Approval'," NBER Working Papers 5340, National Bureau of Economic Research, Inc.
  3. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
  4. 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.
  5. Michael D. Bordo & Christopher Meissner & Angela Redish, 2003. "How "Original Sin" was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions," NBER Working Papers 9841, National Bureau of Economic Research, Inc.
  6. Herschel I. Grossman & John B. Van Huyck, 1987. "Nominally Sovereign Debt, Risk Shifting, and Reputation," NBER Working Papers 2259, National Bureau of Economic Research, Inc.
  7. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  8. Drazen, Allan & Masson, Paul R, 1994. "Credibility of Policies versus Credibility of Policymakers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 735-54, August.
  9. Michael D. Bordo & Marc Flandreau, 2003. "Core, Periphery, Exchange Rate Regimes, and Globalization," NBER Chapters, in: Globalization in Historical Perspective, pages 417-472 National Bureau of Economic Research, Inc.
  10. Maurice Obstfeld & Alan M. Taylor, 2003. "Sovereign risk, credibility and the gold standard: 1870-1913 versus 1925-31," Economic Journal, Royal Economic Society, vol. 113(487), pages 241-275, 04.
  11. Flandreau, Marc & Sussman, Nathan, 2004. "Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century," CEPR Discussion Papers 4248, C.E.P.R. Discussion Papers.
  12. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
  13. Steve Tadelis, 1997. "What's in a Name? Reputation as a Tradeable Asset," Working Papers 97033, Stanford University, Department of Economics.
  14. Mailath,G.J. & Samuelson,L., 1998. "Who wants a good reputation?," Working papers 19, Wisconsin Madison - Social Systems.
  15. Alessandro Missale & Elisabetta Falcetti, . "Public Debt Indexation and Denomination with and Indipendent Central Bank," Working Papers 169, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  16. Tirole, Jean, 1996. "A Theory of Collective Reputations (with Applications to the Persistence of Corruption and to Firm Quality)," Review of Economic Studies, Wiley Blackwell, vol. 63(1), pages 1-22, January.
  17. Cole, Harold L & Dow, James & English, William B, 1995. "Default, Settlement, and Signalling: Lending Resumption in a Reputational Model of Sovereign Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 365-85, May.
  18. Koppl, Roger & Yeager, Leland B., 1996. "Big Players and Herding in Asset Markets: The Case of the Russian Ruble," Explorations in Economic History, Elsevier, vol. 33(3), pages 367-383, July.
  19. Gregory, Paul R., 1979. "The Russian Balance of Payments, the Gold Standard, and Monetary Policy: A Historical Example of Foreign Capital Movements," The Journal of Economic History, Cambridge University Press, vol. 39(02), pages 379-400, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ecm:feam04:446. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.