Original Sin - Analysing Its Mechanics and a proposed Remedy in a Simple Macroeconomic Model
This paper analyses the problem of “original sin“ (the fact that the currency of an emerging market economy usually cannot be used to borrow abroad) in a simple thirdgeneration model of currency crises. The approach differs from alternative frameworks by explicitly modeling the price setting behavior of firms if prices are sticky and the future exchange rate is uncertain. Monetary policy optimally trades off effects on price competitiveness and on debt burdens of firms. It is shown that the proposal by Eichengreen and Hausmann of creating an artificial basket currency as denominator of debt is attractive as a provision against contagion.
|Date of creation:||Jun 2006|
|Date of revision:|
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"Exchange Rates and Financial Fragility,"
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7418, National Bureau of Economic Research, Inc.
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- Axel Lindner, 2006.
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Scandinavian Journal of Economics,
Wiley Blackwell, vol. 108(1), pages 1-14, 03.
- Axel Lindner, 2003. "Does Transparency of Central Banks Produce Multiple Equilibria on Currency Markets?," IWH Discussion Papers 178, Halle Institute for Economic Research.
- Camilo E Tovar, 2005. "International government debt denominated in local currency: recent developments in Latin America," BIS Quarterly Review, Bank for International Settlements, December.
- Jeronimo Zettelmeyer & Olivier Jeanne, 2002. "â€œOriginal Sin,â€ Balance Sheet Crises, and the Roles of International Lending," IMF Working Papers 02/234, International Monetary Fund.
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