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The determinants of "domestic" original sin in emerging market economies

Listed author(s):
  • Julien Reynaud

    ()

    (Department of Economics University of Paris I)

  • Arnaud Mehl

    (European Central Bank)

This paper explains why domestic debt composition in some emerging economies is risky. To this end, it carries out a systematic analysis of the determinants of the so-called domestic original sin, which refers to the inability of emerging economies to borrow domestically in local currency, at long maturities and fixed interest rates. As such, the latter is a measure of financial vulnerabilities arising from domestic debt composition, which encompasses maturity mismatches, rollover risk and interest payment contingency. The paper builds on a large dataset compiled by the authors from national sources. It finds that domestic original sin is particularly severe when inflation is lofty, the debt service-to-GDP ration high, the slope of the yield curve inverted and the investor base narrow. These results suggest that sound macroeconomic policies, attractive long-term yields and policies aimed at widening the investor base are instrumental to overcome domestic original sin, reduce domestic debt riskiness and tilt its composition towards safer, long-term, unindexed, local currency instruments

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File URL: http://repec.org/mmf2006/up.11903.1154949765.pdf
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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 159.

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Date of creation: 02 Feb 2007
Handle: RePEc:mmf:mmfc06:159
Contact details of provider: Web page: http://www.essex.ac.uk/afm/mmf/index.html

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  1. 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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  19. 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.
  20. repec:bge:wpaper:185 is not listed on IDEAS
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