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.