ORIGINAL SIN

Original sin is a term I coined in 1998 and analyzed its consequences first in a paper with Barry Eichengreen and then together in a book with Ugo Panizza to describe a situation in which the residents (or government) of a country are unable to acquire foreign debt that is denominated in their own currency. If a country that suffers from original sin accumulates a net foreign debt, as developing countries are expected to do, it will have an aggregate currency mismatch on its balance sheet.

When economic conditions worsen the country’s real exchange rate typically depreciates, making its foreign debt more expensive precisely when it is harder to pay. Original sin is a key determinant of the stability of output, the volatility of capital flows, the management of exchange rates, and of a country’s credit ratings. After controlling for the level of development, of tax revenues and of public debt, original sin is associated with a credit rating that is significantly lower than in the absence of this problem.

We entered into a debate with Ken Rogoff, Carmen Reinhart and Miguel Savastano, who argued in favor of a hypothesis of debt intolerance; and with Morris Goldstein and Philippe Turner, who argued for currency mismatches. With Ugo Panizza I also updated the evidence on the evolution of original sin and its consequences in a recent paper in the Journal of Globalization and Development.

My current research on this issue involves the implications of the Euro for original sin: does a euro member suffer from original sin? Is this part of the cause of the current euro crisis? More on this soon.

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Original Sin