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11
Original SinThe Pain, the Mystery
And the Road to Redemption Barry Eichengreen, Ricardo Hausmann & Ugo Panizza
UC Berkeley, Harvard, and IDB
22
MotivationMotivation Most countries cannot borrow abroad in their own Most countries cannot borrow abroad in their own
currencies, a problem we referred to three years ago currencies, a problem we referred to three years ago (Eichengreen and Hausmann, “Exchange Rates and (Eichengreen and Hausmann, “Exchange Rates and Financial Fragility,” Kansas City Fed, ed., Financial Fragility,” Kansas City Fed, ed., New New Challenges for Monetary Policy,Challenges for Monetary Policy, 1999) as “original sin” 1999) as “original sin”
If a country has a net foreign debt, this creates an If a country has a net foreign debt, this creates an aggregate currency mismatchaggregate currency mismatch
This mismatch is associated with output and capital This mismatch is associated with output and capital flow volatilityflow volatility
Monetary policies in such countries are rigid, while Monetary policies in such countries are rigid, while their central banks are unable to act as LLRs.their central banks are unable to act as LLRs.
They are vulnerable to crises, of the self-fulfilling They are vulnerable to crises, of the self-fulfilling variety and otherwise.variety and otherwise.
33
Implications for Reform of the Implications for Reform of the International Financial International Financial
ArchitectureArchitecture The conventional prescription of floating is The conventional prescription of floating is
problematic for countries with original sinproblematic for countries with original sin Inflation targeting is more difficult for such Inflation targeting is more difficult for such
countriescountries Stabilizing capital flows is more difficultStabilizing capital flows is more difficult Strengthening financial systems is more difficultStrengthening financial systems is more difficult Avoiding financial crises is more difficultAvoiding financial crises is more difficult All this raises the question of whether the All this raises the question of whether the
“architecture agenda” can succeed without “architecture agenda” can succeed without addressing original sinaddressing original sin
44
Key Question from this Point of Key Question from this Point of ViewView
Does the inability to borrow internationally in Does the inability to borrow internationally in domestic currency reflect problems with country domestic currency reflect problems with country policies and institutions or systematic problems?policies and institutions or systematic problems?
We argue that the problem is too pervasive (and We argue that the problem is too pervasive (and too weakly correlated with country characteristics) too weakly correlated with country characteristics) to be entirely explicable on the first set of grounds.to be entirely explicable on the first set of grounds.
This leads us to a systemic explanation for the This leads us to a systemic explanation for the problem, which in turn leads us to an international problem, which in turn leads us to an international proposal for its solutionproposal for its solution
(We will only touch on causes here; Ugo Panizza will (We will only touch on causes here; Ugo Panizza will have more to say about them in a later session.)have more to say about them in a later session.)
55
Outline of the PaperOutline of the Paper
Original sin: measurementOriginal sin: measurement IncidenceIncidence ConsequencesConsequences CausesCauses Learning from the outliersLearning from the outliers The Road to redemptionThe Road to redemption
66
MeasurementMeasurement Measuring original sin is not straightforward.Measuring original sin is not straightforward. In principle, we want to measure external In principle, we want to measure external
liabilities in own currency as a share of total liabilities in own currency as a share of total external liabilitiesexternal liabilities
We use data gathered by the BIS on the We use data gathered by the BIS on the currency denomination of bonds and money currency denomination of bonds and money market instrumentsmarket instruments
We also consider BIS data on cross-border bank We also consider BIS data on cross-border bank lending, although the data are less complete lending, although the data are less complete (both in country coverage and currency (both in country coverage and currency breakdown)breakdown)
77
Table 1: International bonded Table 1: International bonded debt by country groups and debt by country groups and
currenciescurrencies 1993-1998 Total Debt
Instruments Issued by residents
Total Debt Instruments Issued by residents in
own currency
Total debt instrument issued in
groups’ currency
Share of own
currency
Share of groups’ currency
Major financial centers
939.1 34% 493.6 64% 1868.4 68.1% 52.6% 199.0%
Euroland 855.9 31% 198.4 26% 647.5 23.6% 23.2% 75.7% Other Developed Countries
390.1 14% 68.6 9% 128.2 4.7% 17.6% 32.9%
Developing Countries
269.0 10% 6.3 1% 16.8 0.6% 2.3% 6.3%
International Organizations
289.7 11% 0.0 0% 0.0 0.0% 0.0% 0.0%
ECU 0.0 0% 0.0 0% 82.8 3.0% 0.0% 0.0% Total 2743.7 100% 766.8 100% 2743.7 100.0% 27.9% 100.0%
1999-2001 Major financial centers
2597.7 45% 1773.6 61% 3913.8 67.8% 68.3% 150.7%
Euroland 1885.6 33% 1071.5 37% 1722.2 29.8% 56.8% 91.3% Other Developed Countries
477.6 8% 45.9 2% 89.9 1.6% 9.6% 18.8%
Developing Countries
434.0 8% 11.6 0% 47.4 0.8% 2.7% 10.9%
International Organizations
378.4 7% 0.0 0% 0.0 0.0% 0.0% 0.0%
ECU 0.0 0% 0.0 0% 0.0 0.0% 0.0% 0.0% Total 5773.3 100% 2902.5 100% 5773.3 100.0% 50.3% 100.0%
88
Major FinancialCenters (64 %)
Euroland(26%)
Other Developed (9%)
Developing (>1%)
Total Debt issued in own currency (93-98)
Major FinancialCenters (34 %)
Total Debt issued by residents (93-98)
Euroland(31%)
Other Developed (14%)
Developing (10%)
99
Major FinancialCenters (61 %)
Major FinancialCenters (45 %)
Euroland(37%)
Euroland(33%)
Other Developed (<2%)
Other Developed (8%) Developing
(8%)
InternationalOrganizations (7%)
Total Debt issued in own currency (99-01)
Total Debt issued by residents (99-01)
1010
Things to NoteThings to Note
In 1993-8, Big 4 countries (financial centers: US, UK, Japan, In 1993-8, Big 4 countries (financial centers: US, UK, Japan, Switzerland) issued only 34% of global debt, but fully 68% Switzerland) issued only 34% of global debt, but fully 68% of global debt was denominated in their currencies. of global debt was denominated in their currencies.
(By comparison, countries soon to become members of (By comparison, countries soon to become members of Euroland issued 31% of global debt but 24% was Euroland issued 31% of global debt but 24% was denominated in their currencies. For them, original sin was denominated in their currencies. For them, original sin was a problem, but only a small one.) a problem, but only a small one.)
Other developed countries issued 14% but had only 5% Other developed countries issued 14% but had only 5% denominated in their own currencies. Evidently, original sin denominated in their own currencies. Evidently, original sin is a problem even for developed countries aside from is a problem even for developed countries aside from financial centers.financial centers.
Developing countries issued 10% of global debt but had Developing countries issued 10% of global debt but had only 1% in their own currencies.only 1% in their own currencies.
Main difference after 1998 is growing importance of euro as Main difference after 1998 is growing importance of euro as a currency of denomination (relative to the legacy a currency of denomination (relative to the legacy currencies). currencies).
1111
Table 2: Cross-border bank Table 2: Cross-border bank claimsclaims
1995-1998 Total Bank Debt
of residents (BIL USD)
Total debt in major five currencies
Share in Major Five Currencies
Major Financial Centers 3,141 44.9% 2,448 44.02% 77.9% Euroland 1,637 23.4% 1,479 26.60% 90.3% Other Developed Countries 263 3.8% 167 3.00% 63.5% Offshore 502 7.2% 434 7.80% 86.4% Developing Countries 1,305 18.7% 995 17.89% 76.2% International Organizations 23 0.3% 17 0.31% 71.4% Unallocated 127 1.8% 22 0.40% 17.7% Total 6,998 100.0% 5,561 100.00% 79.5% 1999-2001
Total Bank Debt by residents (BIL USD)
Total debt in major five currencies
Share in Major Five Currencies
Major Financial Centers 3,691 47.3% 3,146 49.59% 85.2% Euroland 2,263 29.0% 2,080 32.79% 91.9% Other Developed Countries 356 4.6% 223 3.52% 62.8% Offshore 458 5.9% 381 6.01% 83.1% Developing Countries 887 11.4% 673 10.61% 75.8% International Organizations 18 0.2% 17 0.27% 93.7% Unallocated 134 1.7% 19 0.30% 14.5% Total 7,808 100.0% 6,344 100.00% 81.3%
1212
Things to NoteThings to Note
In 1993-8, Big 4 countries (financial centers: US, UK, Japan, In 1993-8, Big 4 countries (financial centers: US, UK, Japan, Switzerland) issued only 34% of global debt, but fully 68% Switzerland) issued only 34% of global debt, but fully 68% of global debt was denominated in their currencies. of global debt was denominated in their currencies.
(By comparison, countries soon to become members of (By comparison, countries soon to become members of Euroland issued 31% of global debt but 24% was Euroland issued 31% of global debt but 24% was denominated in their currencies. For them, original sin was denominated in their currencies. For them, original sin was a problem, but only a small one.) a problem, but only a small one.)
Other developed countries issued 14% but had only 5% Other developed countries issued 14% but had only 5% denominated in their own currencies. Evidently, original sin denominated in their own currencies. Evidently, original sin is a problem even for developed countries aside from is a problem even for developed countries aside from financial centers.financial centers.
Developing countries issued 10% of global debt but had Developing countries issued 10% of global debt but had only 1% in their own currencies.only 1% in their own currencies.
Main difference after 1998 is growing importance of euro as Main difference after 1998 is growing importance of euro as a currency of denomination (relative to the legacy a currency of denomination (relative to the legacy currencies). currencies).
1313
Measurement IssuesMeasurement Issues
In constructing a measure of original sin, we In constructing a measure of original sin, we would like to take into account both bank and would like to take into account both bank and bond market data.bond market data.
We would like to acknowledge the fact that in We would like to acknowledge the fact that in some cases countries may be able to hedge some cases countries may be able to hedge their currency exposurestheir currency exposures
To this end, we measure original sin in several To this end, we measure original sin in several alternative ways.alternative ways.
It turns out that are key results emerge almost It turns out that are key results emerge almost regardless of which of the following indices we regardless of which of the following indices we use.use.
1414
A First Measure Considering A First Measure Considering Only Bond Data (the higher the Only Bond Data (the higher the
value, the greater the sin)value, the greater the sin)
i
iiOSIN i
country by issued Securities
currency in country by issued Securities11
1515
A Second Measure (including A Second Measure (including loans as well as securities)loans as well as securities)
i
iINDEXAi
country by issued Loans Securities
currenciesmajor in country by issued Loans Securities
1616
A Third Measure (which A Third Measure (which accounts for the fact that debt accounts for the fact that debt in currency in currency ii issued by other issued by other
countries creates an countries creates an opportunity for country opportunity for country ii to to
hedge)hedge)
i
iINDEXBi
country by issued Securities
currency in Securities1
1717
A Fourth Measure (which A Fourth Measure (which eliminates negative values, eliminates negative values, where there is more debt in where there is more debt in
currency currency i i than country than country i i has in has in total, since countries cannot total, since countries cannot hedge more debt than they hedge more debt than they
issue)issue)
0,
country by issued Securities
currency in Securities1max3
i
iOSIN i
1818
Note that we consider yet additional Note that we consider yet additional measures in the paper.measures in the paper.
But in Table 1, please focus on the But in Table 1, please focus on the columns for columns for OSINOSIN3, this last measure.3, this last measure.
Note that we distinguish the periods Note that we distinguish the periods before and after the advent of the before and after the advent of the euro.euro.
1919
Table 3: Measures of Table 3: Measures of original sin by country original sin by country
groupingsgroupingsGroup
OSIN1 1993-1998
OSIN1 1999-2001
OSIN2 1993-1998
OSIN2 1999-2001
OSIN3 1993-1998
OSIN3 1999-2001
Financial centers 0.58 0.53 0.34 0.37 0.07 0.08
Euroland 0.86 0.52 0.55 0.72 0.53 0.09*
Other Developed 0.90 0.94 0.80 0.82 0.78 0.72
Offshore 0.98 0.97 0.95 0.98 0.96 0.87
Developing 1.00 0.99 0.98 0.99 0.96 0.93
LAC 1.00 1.00 1.00 1.00 0.98 1.00
Middle East & Africa
1.00 0.99
0.97 0.99 0.95 0.90
Asia & Pacific 1.00 0.99 0.95 0.99 0.99 0.94
Eastern Europe 0.99 1.00 0.97 0.98 0.91 0.84
2020
GraphGraph 11: Measures of : Measures of original sin by country original sin by country
groupingsgroupings
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Financial Centers Euroland Other Developed Developing
OSIN1 OSIN2 OSIN3
2121
GraphGraph 22: Measures of original : Measures of original sin by sin by regions (developing regions (developing
countries)countries)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
LAC Middle East & AfricaAsia & PacificEastern Europe
OSIN1 OSIN2 OSIN3
2222
Things to NoteThings to Note
Lowest levels of original sin for the financial Lowest levels of original sin for the financial centers, followed by the Euroland countriescenters, followed by the Euroland countries
Note that the Euroland countries experience a Note that the Euroland countries experience a major decline in original sin following the major decline in original sin following the introduction of the eurointroduction of the euro
Other industrial countries have higher values.Other industrial countries have higher values. Developing countries have still higher values.Developing countries have still higher values. Among developers, OS is lowest for accession Among developers, OS is lowest for accession
economies, highest in Latin America.economies, highest in Latin America.
2323
Table 4: Countries with OSIN3 Table 4: Countries with OSIN3 <0.8, excluding financial <0.8, excluding financial
centerscenters Non Euroland Euroland Country 1993 -98 1999 -01 Country 1993 -98 1999-01 Czech Republic 0.0 0.00 Italy 0.00 0.00 Poland 0.82 0.00 France 0.23 0.12 New Zealand 0.63 0.05 Portugal 0.42 0.24 South Africa 0.44 0.10 Belgium 0.76 0.39 Hong Kong 0.72 0.29 Spain 0.59 0.42 Taiwan 1.00 0.54 Netherlands 0.64 0.47 Singapore 0.96 0.70 Ireland 0.94 0.59 Australia 0.55 0.70 Greece 0.93 0.60 Denmark 0.80 0.71 Finland 0.96 0.62 Canada 0.55 0.76 Austria 0.90 0.68
2424
Graph 3: Graph 3: OSIN3OSIN3 in Euroland in Euroland
0
0.23
0.42
0.76
0.590.64
0.94 0.930.96
0.9
0
0.12
0.24
0.390.42
0.47
0.59 0.6 0.62
0.68
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Italy France Portugal Belgium Spain Netherlands Ireland Greece Finland Austria
93-98 99-01
2525
The Non-Euroland outliers The Non-Euroland outliers are not all floatersare not all floaters
1
2
3
Australia Canada Poland Czech Rep.
South Africa
SingaporeDenmark HongKong
New Zealand
Floaters
Intermediate
FixersLYS 3
Average 1993 - 2001
2626
Things to NoteThings to Note
The Euroland countries of course feature The Euroland countries of course feature prominentlyprominently
Accession economies and overseas regions of Accession economies and overseas regions of 1919thth century European settlement are also century European settlement are also numerous.numerous.
Both fixed-rate Hong Kong and floating-rate Both fixed-rate Hong Kong and floating-rate Singapore and Taiwan appear on this list Singapore and Taiwan appear on this list (raising questions about whether a particular (raising questions about whether a particular exchange rate regime helps for eliminating exchange rate regime helps for eliminating original sin)original sin)
2727
Original Sin is also Original Sin is also PersistentPersistent
Table 5 in the paper classifies countries Table 5 in the paper classifies countries as issuing (gold) indexed debt or as issuing (gold) indexed debt or domestic currency debt in the mid-19domestic currency debt in the mid-19thth century. (Some cases are mixed.)century. (Some cases are mixed.)
It shows a very strong and significant It shows a very strong and significant correlation with countries suffering from correlation with countries suffering from original sin (issuing foreign currency original sin (issuing foreign currency denominated or indexed debt) today.denominated or indexed debt) today.
2828
Original sin is highly Original sin is highly persistentpersistent
00.10.20.30.40.50.60.70.80.9
GoldClauses
MixedClauses
DomesticCurrency
OSIN3 and Flandreau-Sussman classification circa 1850
3030
Recall the ProblemRecall the Problem
If an original sin country has a net foreign debt and If an original sin country has a net foreign debt and it is in foreign currency, then there is an aggregate it is in foreign currency, then there is an aggregate currency mismatchcurrency mismatch
If no one else issues debt in its currency, then If no one else issues debt in its currency, then foreign exposures can then be passed around by foreign exposures can then be passed around by residents like a hot potato, but foreign exposure residents like a hot potato, but foreign exposure cannot be hedged in the aggregate.cannot be hedged in the aggregate.
This can have important implications for exchange This can have important implications for exchange rate policy, capital flows, and output volatility, rate policy, capital flows, and output volatility, among other things. We explore these implications among other things. We explore these implications in turn, starting with the exchange rate.in turn, starting with the exchange rate.
3131
Original sin and exchange Original sin and exchange rate flexibilityrate flexibility
We use the Levy-Yeyati and Sturzenegger We use the Levy-Yeyati and Sturzenegger classification, M2/Reserves, and exchange classification, M2/Reserves, and exchange rate variability/reserve variability as 3 rate variability/reserve variability as 3 measures of the dependent variable.measures of the dependent variable.
Note that there are good reasons to think that Note that there are good reasons to think that these things will be affected by original sin. these things will be affected by original sin.
There are of course the theoretical reasons There are of course the theoretical reasons mentioned earlier. But there are also mentioned earlier. But there are also empirical reasons. Consider:empirical reasons. Consider:
32320 0.2 0.4 0.6 0.8 1
United StatesUnited Kingdom
JapanNew Zealand
CanadaAustralia
South AfricaDominican Rep.
SwitzerlandGermany
IndiaSwedenThailand
PhilippinesKorea
JamaicaBrazil
ParaguayIsrael
NorwayMexico
GuatemalaCzech. Republic
IndonesiaGreece
ColombiaPoland
ChilePeru
Singapore
0.013
0.021
0.048
0.057
0.058
0.062
0.064
0.087
0.094
0.105
0.133
0.137
0.230
0.242
0.243
0.245
0.253
0.259
0.262
0.287
0.302
0.303
0.314
0.335
0.362
0.409
0.446
0.485
0.637
0.879
Reserves/M2
Levels of ReservesLevels of Reserves
3333
e( R
ES
M2
| X)
e( SIN33_A | X )-.878934 .307706
-.410813
.341941
CZE
USA
CHE
JPN
ZAF
TTO
HKG
CANSURAUS
NIC
NZD
IND
IDN
PAK
POL
ZWE
LKA
MDA
PHL
SVK
BOLPNGUKR
BGR
ROM
MAR
JORJAM
KAZ
DOM
BHR
GTMTHA
SLV
BRB
TUN
LVA
BHS
LBN
PER
RUS
COL
MUS
MYS
TUR
CRI
MEX
EST
VEN
HUN
CHL
MLT
DNK
BRA
OMN
CYP
URY
ARG
SVN
KORISRISL
NOR
Original sin and reserves over M2
34340 5 10 15 20 25 30 35
JamaicaNorwayGreecePoland
GuatemalaChilePeru
ParaguaySingapore
IsraelMexico
ColombiaSweden
IndiaCzechKorea
Dominican Rep.Indonesia
SwitzerlandPhilippines
South AfricaGermany
BrazilCanada
ThailandAustralia
New ZealandUnited Kingdom
United StatesJapan
0.272
0.362
0.390
0.416
0.417
0.424
0.506
0.615
0.690
0.760
0.838
0.926
0.976
1.215
1.260
1.345
1.583
2.154
2.272
2.324
2.466
2.842
2.920
3.369
6.617
6.913
12.682
17.946
.380
30.454
Relative Volatilities: Exchange Rate and Reserves
Intervention using reservesIntervention using reserves
std(dev)/std(res/m2)
3535
e( R
VE
R |
X)
e( SIN33_A | X )-.878092 .309288
-1.08857
1.61765
CZE
USA
CHE
JPN
ZAF
TTO
HKG
CAN
AUS
NICNZD
IND
IDNPAK
POLZWELKAMDAPHL
SVKPNG
BOLUKR
BGR
JOR
ROMMAR
JAM
BHR
KAZ
DOMSGP
ECUGTMTHA
SLV
BRB
TUN
BHS
LVA
LBN
PERRUS
COL
MYS
MUS
TUR
CRI
MEX
EST
HUN
VENCHL
MLT
DNK
OMN
CYP
URYARG
SVN
KOR
ISR
ISL
NOR
Original Sin and relative volatility of exchange and
reserves
3636
Multivariate AnalysisMultivariate Analysis
We control for GDP per capita, openness, and foreign We control for GDP per capita, openness, and foreign debt/GNP, and focus on the coefficient of OSIN3.debt/GNP, and focus on the coefficient of OSIN3.
We run weighted LS (weighted by share of securities in We run weighted LS (weighted by share of securities in total debt) and also ordered probit for the LYS total debt) and also ordered probit for the LYS measure.measure.
OS is negatively correlated with exchange rate OS is negatively correlated with exchange rate flexibility using all 3 measures. (Time series and cross flexibility using all 3 measures. (Time series and cross section evidence, and instrument variables regressions, section evidence, and instrument variables regressions, support that this is not reserve causality.)support that this is not reserve causality.)
The effect is important: eliminating OS is enough to The effect is important: eliminating OS is enough to move countries by a full category in the LYS move countries by a full category in the LYS classification.classification.
3737
Table 6: Original sin and Table 6: Original sin and exchange rate flexibilityexchange rate flexibility
(1) (2) (3) LYS RESM2 RVER
OSIN3 0.984 0.248 -0.801 (2.98)*** (3.74)*** (2.02)** LGDP_PC 0.268 -0.053 0.026 (3.61)*** (1.85)* (0.61) OPEN 0.178 -0.014 1.017 (1.85)* (0.41) (2.88)*** SHARE2 58.719 -35.858 -569.562 (0.46) (0.66) (2.36)** Constant -1.389 0.531 0.104 (1.79)* (1.73)* (0.17) Observations 75 65 65 R-squared 0.22 0.37 0.62
3838
Output and Capital Flow Output and Capital Flow VolatilityVolatility
Output volatility is measured as the SD of GDP Output volatility is measured as the SD of GDP growth.growth.
Capital flow volatility is the SD of capital Capital flow volatility is the SD of capital flow/domestic credit ratioflow/domestic credit ratio
We control for level of development, openness, We control for level of development, openness, foreign debt, and terms of trade volatility.foreign debt, and terms of trade volatility.
Again, we run weighted least squaresAgain, we run weighted least squares Original sin account for more than ¼ of the Original sin account for more than ¼ of the
difference in volatility between developed and difference in volatility between developed and developing countries.developing countries.
3939
Table 7: Original sin and Table 7: Original sin and volatility volatility
(1) (2) VOL_GROWTH VOL_FLOW
OSIN3 0.011 7.103 (1.96)* (3.58)*** LGDP_PC -0.012 -3.214 (2.14)** (2.56)** OPEN -0.001 -4.181 (0.12) (1.20) VOL_TOT -0.000 0.223 (0.86) (1.08) SHARE2 -14.287 147.265 (1.72)* (0.04) Constant 0.135 32.825 (2.25)** (2.39)** Observations 77 33 R-squared 0.40 0.64
4040
Original Sin & Credit RatingsOriginal Sin & Credit Ratings
Countries with original sin will have more Countries with original sin will have more volatile debt service ratios and deficits, volatile debt service ratios and deficits, because their service obligations will be more because their service obligations will be more exchange-rate and interest-rate sensitive.exchange-rate and interest-rate sensitive.
Greater fiscal volatility means lower credit Greater fiscal volatility means lower credit ratings, other things equal.ratings, other things equal.
This can explain, inter alia, why the This can explain, inter alia, why the correlation of credit ratings with debt and correlation of credit ratings with debt and deficit variables is so low (as shown on the deficit variables is so low (as shown on the next slide).next slide).
4141
The Weak Relationship The Weak Relationship Between Debt/GDP and Between Debt/GDP and
Credit RatingsCredit Ratings
rati
ng
fo
reig
n c
urr
ency
net_debt/gdp-.291965 1.13803
5
19
ARG
AUS
AUT
BEL
BRA
CAN
CHN
CRI
CYP
CZE
DNK
DOM
EST
FIN
DEU
GRC
HUN
ISL
IND
ISR
ITA
JPN
JOR
LVA
MEXMAR
NOR
PAK
PAN
PRY
POL
PRT
SVN
ESPSWE
TTO
TUN
TUR
GBR USA
4242
Multivariate AnalysisMultivariate Analysis
We control for standard determinants of We control for standard determinants of credit rates, public debt/GDP, public credit rates, public debt/GDP, public debt/tax revenues, and level of debt/tax revenues, and level of development.development.
Estimates are by weighted least squares Estimates are by weighted least squares and double censored Tobit.and double censored Tobit.
Results, on next slide, suggest that Results, on next slide, suggest that eliminating original sin increases country eliminating original sin increases country credit rating by three notches.credit rating by three notches.
4343
Table 8: Original sin and Table 8: Original sin and credit ratingscredit ratings
(1) (2) (3) (4) RATING1 RATING1 RATING1 RATING1 DE_GDP2 -1.553 -1.815 (1.91)* (2.19)** DE_RE2 -0.599 -0.665 (1.40) (1.52) LGDP_PC 3.189 3.051 2.884 2.764 (8.54)*** (7.59)*** (6.47)*** (5.68)*** OSIN3 -3.429 -3.324 -4.883 -4.435 (3.85)*** (3.49)*** (3.49)*** (3.11)*** Constant -12.369 -11.059 -8.751 -7.889 (3.16)*** (2.60)** (1.89)* (1.57) Observations 56 49 51 44 R-squared 0.82 0.81 0.81 0.80
Causes of original sinCauses of original sin
Immaculate conception and Immaculate conception and the road to redemption the road to redemption
Miner’s canary or cause?Miner’s canary or cause?
Is OS one more symptom of Is OS one more symptom of poor institutions, or is it a poor institutions, or is it a
different kind of different kind of phenomenon?phenomenon?
4646
Recent TheoriesRecent Theories
Underdevelopment of institutions and Underdevelopment of institutions and policies in generalpolicies in general
Inadequate monetary credibilityInadequate monetary credibility Fiscal profligacyFiscal profligacy Weak contract enforcementWeak contract enforcement Presence or absence of trade sanctionsPresence or absence of trade sanctions Political economy storiesPolitical economy stories We will leave our discussion of these We will leave our discussion of these
theories and evidence to Ugo tomorrow, but theories and evidence to Ugo tomorrow, but here we need to make one important point:here we need to make one important point:
4747
Inadequacy of Conventional Inadequacy of Conventional ExplanationsExplanations
None of a variety of measures of levels of None of a variety of measures of levels of development, monetary credibility, fiscal development, monetary credibility, fiscal profligacy, strength of contract enforcement, profligacy, strength of contract enforcement, trade dependence, or political economy have trade dependence, or political economy have much traction.much traction.
Same is true for a variety of samples, Same is true for a variety of samples, specifications and econometric treatments.specifications and econometric treatments.
Only robust correlates are country size and Only robust correlates are country size and financial-center status (which is, in a sense, financial-center status (which is, in a sense, what we are trying to explain).what we are trying to explain).
4848
Why Might a Few Important Why Might a Few Important Currencies So Dominate the Global Currencies So Dominate the Global
Portfolio?Portfolio? Additional currencies add decreasing Additional currencies add decreasing
diversification benefits but constant diversification benefits but constant transaction costs.transaction costs.
International transaction costs and International transaction costs and heterogeneityheterogeneity
Network externalities may give a small Network externalities may give a small number of vehicle currencies special number of vehicle currencies special attraction.attraction.
Countries seeking to add their currencies to Countries seeking to add their currencies to the global portfolio thus face an uphill battle.the global portfolio thus face an uphill battle.
And each that succeeds makes life tougher And each that succeeds makes life tougher for the others.for the others.
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Bottom LineBottom Line
Original sin is not merely a problem of Original sin is not merely a problem of country policies (one need not deny the country policies (one need not deny the relevance of these, of course).relevance of these, of course).
It is also a problem with the operation of the It is also a problem with the operation of the international system (given transactions international system (given transactions costs, a world of heterogeneous countries, costs, a world of heterogeneous countries, and network effects that lock in the status and network effects that lock in the status quo).quo).
Redemption therefore requires international Redemption therefore requires international action to overcome the inertia in the system.action to overcome the inertia in the system.
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Lessons from outliersLessons from outliers
Countries that have recently escaped Countries that have recently escaped original sin seem to have done so original sin seem to have done so through non-nationals issuing debt in through non-nationals issuing debt in domestic currencydomestic currency
IFIs have played a major role in this IFIs have played a major role in this processprocess
Borrowers swap their obligations with Borrowers swap their obligations with residentsresidents
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Our proposalOur proposal
We propose an index based on an We propose an index based on an inflation-adjusted basket of EM inflation-adjusted basket of EM currenciescurrencies Historically it shows trend appreciation, Historically it shows trend appreciation,
low volatility and negative correlation with low volatility and negative correlation with industrial country consumptionindustrial country consumption
We propose that the WB, other IFIs and We propose that the WB, other IFIs and C-5 governments issue debt in this C-5 governments issue debt in this index and swap obligations with EMsindex and swap obligations with EMs
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The seminarThe seminar
Theoretical papers on consequences of OSTheoretical papers on consequences of OS Cespedes, Chang and Velasco ask what are the Cespedes, Chang and Velasco ask what are the
consequences for domestic policies and for the consequences for domestic policies and for the ability to stabilize the economyability to stabilize the economy
Jeanne and Zettelmeyer ask about the Jeanne and Zettelmeyer ask about the implications for the international financial implications for the international financial architecturearchitecture
Historical papers on the origin of OSHistorical papers on the origin of OS Bordo Meissner and RedishBordo Meissner and Redish Flandreau and SussmanFlandreau and Sussman
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The seminarThe seminar
Theoretical papers on causes of OSTheoretical papers on causes of OS Jeanne on poor monetary credibilityJeanne on poor monetary credibility Corsetti on fiscal dynamics and crisesCorsetti on fiscal dynamics and crises Chamon and Hausmann on the Chamon and Hausmann on the
interaction between borrowers and CBsinteraction between borrowers and CBs EHP on the empirical mystery of OSEHP on the empirical mystery of OS
RedemptionRedemption Detailes outline of our proposalDetailes outline of our proposal