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Original sin

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Original Sin The Pain, the Mystery And the Road to Redemption Barry Eichengreen, Ricardo Hausmann & Ugo Panizza UC Berkeley, Harvard, and IDB PART II THE MYSTERY ... – PowerPoint PPT presentation

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Title: Original sin


1
Original Sin The Pain, the Mystery And the Road
to Redemption
Barry Eichengreen, Ricardo Hausmann Ugo
Panizza UC Berkeley, Harvard, and IDB
2
PART II THE MYSTERY
3
Indexes of Original Sin (the higher the value,
the greater the sin)
i
i
currency
in

country
by

issued

Securities
-

OSIN
1
1
i
i
country
by

issued

Securities
Securities
Loans by country i
currencies
major
in





INDEXA
i
Securities
Loans by country i



0)
(1
currency
in
Securities
i

,
Max
3
OSIN
-
i
country
by

issued
Securities
i

)
3
,
Max (
2
OSIN
INDEXA
OSIN

i
i
i
4
Reacting to yesterday
  • Several people argued that developing the local
    market for long-term fixed-rate debt is the key
    to solving international original sin
  • Let us look at measures of this domestic ability
    to borrow at home in own currency (JP Morgans
    Guide to Local Currency markets)


DST
FC

DSIN


DLT
DDST
FC
5
Domestic original sin
Argentina
Malaysia
Venezuela
Indonesia
Turkey
Brazil
Greece
Mexico
Hong Kong
Czech Republic
Chile
Philippines
Poland
Hungary
Israel
Singapore
Thailand
Slovak Republic
South Africa
India
Taiwan
0
0.2
0.4
0.6
0.8
1
1.2
6
Brazil
India
Israel
Turkey
Venezuel
Malaysia
Mexico
1
Philippnesi
Indonesi
Chile
Hungary
Argentin
Egypt, A
Slovak R
Singapore
Greece
Taiwan
OSIN
Hong Kong
South Africa
Czech Re
Poland
0
.010961
1
DSIN
7
Recent Theories
  • Underdevelopment of institutions and policies in
    general
  • Inadequate monetary credibility
  • Fiscal profligacy
  • Weak contract enforcement
  • Presence or absence of trade sanctions
  • Political economy stories

8
Original Sin and the level of development
(1)
(2)
(3)
(4)
Dropping Financial
Centers
OSIN3
OSIN3
LGDP_PC
-0.012
-0.036
-0.007
-0.021
(0.74)
(1.23)
(0.42)
(1.10)
SIZE
-0.072
-0.190
-0.083
-0.139
(2.37)
(3.83)
(2.50)
(3.25)
FIN_CENTER
-0.767
(7.37)
EUROLAND
-0.239
-0.236
(1.94)
(1.93)
OTH_DEVELOPED
-0.066
-0.069
(0.67)
(0.71)
Constant
1.061
1.25
1.022
1.130
(9.17)
(5.41)
(8.73)
(7.40)
Observations
75
75
69
69
9
SGP
.359822
BEL
MEX
IND
PAK
GRC
SWE
GBR
AUT
IDN
LKA
TUR
KOR
NOR
THA
HUN
JOR
FIN
BHR
COL
MAR
ISR
DNK
TUN
MLT
USA
ZWE
ISL
UKR
NET
SLV
DOM
SVN
CHL
MDA
DEU
CRI
PER
ARG
KAZ
CAN
MUS
CYP
ESP
SVK
EST
LVA
POL
LUX
BOL
CHE
e( SIN33_A X)
AUS
FRA
ZAF
ITA
CZE
-.898761
-1.72332
1.2301
e( LGDP_PC X )
10
coef .02726463, (robust) se .08081867, t .34
IDN
TUR
VEN
MYS
ARG
.426209
BRA
GRC
MEX
EGY
HKG
CZE
e( dsin2 X)
CHL
PHL
POL
HUN
ISR
SGP
THA
SVK
ZAF
IND
-.53772
-2.32983
1.77617
e( GDP_PC X )
11
Original Sin and Monetary Credibility
  • Foreign investors do not want to lend in a unit
    that the borrower can manipulate
  • This should not apply as much to private
    borrowers
  • Why no inflation indexed debt?
  • There is a peso problem and borrowers do not want
    to use their own currency

12
Original sin and monetary credibility
(1)
(2)
(3)
(4)
Dropping
OLS same
Instrumental
Fin centers
sample as 4
Variables
OSIN3
OSIN3
OSIN3
OSIN3
AV_INF
0.098
0.100
0.119
-0.132
(2.09)
(2.10)
(1.41)
(1.57)
SIZE
-0.104
-0.113
-0.183
-0.183
(2.83)
(2.88)
(3.36)
(3.34)
FIN_CENTER
-0.716
-0.598
-0.595
(7.42)
(5.12)
(5.34)
EUROLAND
-0.146
-0.136
-0.225
-0.222
(1.41)
(1.31)
(1.57)
(1.59)
OTH_DEVELOPED
-0.070
-0.062
-0.105
-0.102
(0.91)
(0.81)
(1.31)
(0.76)
Constant
0.953
0.954
1.055
1.060
(33.00)
(32.47)
(19.12)
(22.26)
Observations
74
68
33
33
R-squared
0.66
0.37
0.76
0.76
13
SGP
.386774
BEL
MEX
GRC
SWE
GBR
AUT
IND
PAK
TUR
ISR
LKA
UKR
IDN
NOR
KOR
JOR
HUN
FIN
THA
MLT
BHR
MAR
DNK
PER
COL
ARG
ISL
TUN
USA
NET
KAZ
ZWE
DEU
SVN
SLV
DOM
CHL
CRI
MDA
CYP
CAN
MUS
BOL
ESP
EST
LVA
SVK
POL
LUX
CHE
AUS
e( SIN33_A X)
FRA
ZAF
ITA
CZE
-.920488
-1.58672
3.08266
e( INF X )
14
.470317
MYS
IDN
VEN
TUR
ARG
BRA
GRC
MEX
EGY
HKG
CZE
CHL
e( dsin2 X)
PHL
POL
HUN
ISR
SGP
THA
SVK
ZAF
IND
-.53772
-.242879
1.08381
e( AV_INF X )
15
MYS
IDN
VEN
TUR
.466594
GRC
MEX
EGY
HKG
CZE
CHL
e( dsin2 X)
PHL
POL
HUN
ISR
SGP
THA
SVK
ZAF
IND
-.497336
-.150053
.313087
e( AV_INF X )
16
Original sin in Euroland
120
100
80
60
40
20
0
?
?
?
17
Original sin in Euroland
120
100
80
60
40
20
0
?
Luxembourg
Germany
18
Original sin in Euroland
120
100
80
60
40
20
0
Luxembourg
Netherlands
Germany
Portugal
Belgium
Austria
Finland
Ireland
France
Greece
Italy
Spain
19
Original sin and contract enforcement
  • Investors are reluctant to lend to government if
    institutions designed to enforce their claims are
    weak
  • Weak institutions prevent the creation of
    sophisticated contracts that could limit moral
    hazard at the borrower level (Chamon, 2002,
    Aghion et al., 2002)

20
Original sin and contract enforcement
(1)
(2
OSIN3
OSIN3
Dropping
Financial
Centers
RULEOFLAW
0.038
0.038
(0.98)
(0.97)
SIZE
-0.098
-0.107
(2.77)
(2.83)
FIN_CENTER
-0.803
(8.81)
EUROLAND
-0.219
-0.210
(2.07)
(2.00)
OTH_DEVELOPED
-0.152
-0.145
(1.73)
(1.67)
Constant
0.975
0.976
(47.90)
(46.69)
Observations
75
69
R-squared
0.66
0.37
21
SGP
.391291
BEL
IND
MEX
GBR
AUT
SWE
GRC
PAK
TUR
KOR
LKA
BHR
FIN
NOR
HUN
JOR
ISR
MAR
IDN
THA
DNK
TUN
USA
COL
NET
CHL
MLT
ISL
ARG
ZWE
UKR
DOM
SVN
CRI
PER
MDA
MUS
DEU
CAN
SLV
CYP
KAZ
POL
ESP
EST
LVA
SVK
LUX
BOL
CHE
AUS
e( SIN33_A X)
FRA
ZAF
ITA
CZE
-.924132
-.924632
.846272
e( RULEOFLAW X )
22
IDN
VEN
TUR
ARG
MYS
.443264
GRC
MEX
EGY
HKG
CZE
CHL
e( dsin2 X)
PHL
POL
HUN
ISR
SGP
THA
SVK
ZAF
IND
-.520665
-1.27337
1.58399
e( KAUFF X )
23
Original sin and fiscal solvency
  • Governments with weak fiscal account will have
    incentives to debase their currencies
  • Lucas and Stokey (1983)
  • Calvo and Guidotti (1990)
  • Corsetti and Mackowiak (2002)

24
Original sin and fiscal solvency
(1)
(2)
(3)
(4)
OSIN3
OSIN3
OSIN3
OSIN3
DE_GDP
-0.145
(1.85)
DE_RE
-0.035
(1.18)
DEFICIT
-0.313
(0.49)
FISC
-0.073
(1.62)
SIZE
-0.117
-0.099
-0.126
-0.123
(3.32)
(2.75)
(3.20)
(3.22)
Fin_Cent
-0.745
-0.759
-0.737
-0.742
(7.19)
(8.70)
(6.73)
(6.75)
Euroland
-0.152
-0.180
-0.160
-0.154
(1.71)
(1.81)
(1.62)
(1.63)
Oth_Dev
-0.120
-0.109
-0.121
-0.123
(1.80)
(1.39)
(1.61)
(1.74)
Constant
1.066
0.996
1.056
0.996
(23.28)
(26.20)
(18.41)
(41.56)
N.Obs
64
74
57
57
R-squared
0.67
0.66
0.65
0.66
25
SGP
BEL
.264978
MEX
IDN
SWE
GBR
GRC
THA
NOR
PAK
AUT
KOR
COL
IND
FIN
TUR
LKA
HUN
MLT
SLV
TUN
UKR
JOR
DOM
ISR
SVN
MAR
DNK
USA
ZWE
ISL
SVK
KAZ
CHL
NET
DEU
CRI
EST
LVA
ESP
PER
ARG
CYP
MDA
MUS
CAN
POL
CHE
BOL
LUX
AUS
e( SIN33_A X)
ZAF
FRA
ITA
CZE
-.847888
-1.29744
1.39966
e( FISC X )
26
TUR
IDN
.551769
GRC
MEX
CZE
CHL
e( dsin2 X)
PHL
POL
HUN
ISR
SGP
THA
SVK
ZAF
IND
-.41216
-.486835
.755834
e( DE_GDP X )
27
Original Sin and Trade
  • Countries that trade heavily have more incentives
    to meet their contractual obligations (Eaton and
    Gersovitz, 1981)
  • Should not affect denomination
  • Trade creates deeper currency markets

28
Original Sin and Trade
(1)
(2)
OSIN3
OSIN3
Dropping
Financial
Centers
OPEN
-0.033
-0.028
(0.98)
(0.85)
SIZE
-0.087
-0.095
(2.25)
(2.34)
FIN_CENTER
-0.780
(8.77)
EUROLAND
-0.254
-0.244
(2.24)
(2.16)
OTH_DEVELOPED
-0.090
-0.083
(1.13)
(1.05)
Constant
0.996
0.992
(35.46)
(35.40)
Observations
75
69
R-squared
0.69
0.34
29
GRC
.241124
MEX
BEL
PAK
IND
GBR
SWE
TUR
AUT
KOR
COL
IDN
FIN
LKA
ISR
SGP
NOR
HUN
MAR
USA
DNK
THA
BHR
ISL
JOR
ARG
SLV
TUN
CHL
PER
ZWE
SVN
CRI
MDA
DEU
CYP
DOM
NET
KAZ
ESP
UKR
MUS
EST
LVA
CAN
POL
SVK
BOL
CHE
AUS
LUX
e( SIN33_A X)
ZAF
FRA
ITA
CZE
-.943281
-.431822
1.81548
e( OPEN X )
30
Original sin and political economy
  • The presence of a domestic constituency of local
    currency debt-holders may limit the governments
    incentives to debase its currency
  • So original sin arises from the fact that,
    without a domestic constituency, the government
    cannot commit to protect foreign bond-holders
    (Tirole, 2002)

31
Original sin and political economy
(1)
(2)
(3)
(4)
OSIN3
OSIN3
OSIN3
OSIN3
Dropping
Financial
Centers
DC_GDP
-0.084
(0.96)
FOR_DOM
-0.883
(1.17)
SIZE_FIN
-0.069
-0.298
(0.33)
(1.05)
SIZE
-0.093
-0.105
-0.095
-0.098
(2.70)
(2.75)
(2.69)
(2.71)
FIN_CENTER
-0.700
-0.725
-0.747
(6.23)
(8.09)
(7.68)
EUROLAND
-0.135
-0.170
-0.167
-0.123
(1.12)
(1.68)
(1.53)
(1.06)
OTH_DEVELOPED
-0.082
-0.091
-0.096
-0.078
(1.09)
(1.20)
(1.28)
(1.07)
Constant
1.019
0.990
0.979
0.971
(25.01)
(45.71)
(43.91)
(38.11)
R-squared
0.66
0.66
0.66
0.37
32
BEL
SGP
.287533
MEX
GRC
PAK
IND
SWE
AUT
IDN
TUR
GBR
KOR
LKA
NOR
COL
HUN
ISR
THA
FIN
JOR
MAR
DNK
TUN
MLT
ISL
SLV
USA
ZWE
NET
CHL
ARG
UKR
SVN
PER
DOM
CRI
MDA
CYP
DEU
KAZ
ESP
CAN
MUS
SVK
EST
LVA
POL
BOL
CHE
AUS
e( SIN33_A X)
FRA
ZAF
ITA
CZE
-.903856
-.364298
.212954
e( SIZE_FIN X )
33
Putting everything together
OSIN3
OSIN3_NOI
OSIN3
OSIN3
Dropping Financial
centers
LGDP_PC
-0.022
0.011
-0.056
-0.009
-0.045
(0.47)
(0.23)
(1.04)
(0.17)
(0.93)
FISC
-0.071
-0.097
-0.095
-0.062
-0.069
(1.33)
(1.89)
(1.52)
(1.04)
(1.21)
SIZE
-0.146
-0.157
-0.241
-0.147
-0.148
(3.10)
(3.21)
(3.86)
(2.93)
(2.90)
SIZE_FIN
0.062
0.020
0.270
-0.106
-0.158
(0.25)
(0.09)
(0.53)
(0.23)
(0.41)
RULEOFLAW
0.086
0.004
0.035
0.075
0.052
(0.98)
(0.06)
(0.38)
(0.85)
(0.60)
INF
0.040
0.013
0.054
0.037
0.043
(1.59)
(0.70)
(1.58)
(1.45)
(1.52)
OPEN
-0.136
-0.111
-0.155
-0.095
-0.031
(1.39)
(1.22)
(1.10)
(0.78)
(0.26)
FIN_CENTER
-0.746
-0.687
(7.11)
(7.11)
EUROLAND
-0.168
-0.152
-0.148
(1.69)
(1.60)
(1.35)
OTH_DEVELOPED
-0.163
-0.173
-0.159
(1.68)
(1.81)
(1.65)
Constant
1.240
1.018
1.550
1.104
1.337
(3.50)
(2.85)
(3.33)
(2.73)
(3.40)
R-squared
0.68
0.73
0.48
0.45
0.43
34
GRC
.327155
BEL
ISL
AUT
PAK
GBR
SWE
LKA
MLT
ISR
MEX
COL
SLV
CYP
FIN
JOR
TUR
NOR
HUN
IDN
MDA
DNK
SGP
KOR
PER
MAR
ZWE
TUN
SVN
USA
THA
IND
CRI
DEU
KAZ
ARG
BHR
CHE
BOL
LVA
EST
CHL
MUS
DOM
UKR
NET
SVK
ESP
LUX
CAN
POL
AUS
e( SIN33_A X)
ZAF
FRA
ITA
CZE
-.950572
-1.24736
2.16883
e( SIZE X )
35
coef -.13523022, (robust) se .04692612, t
-2.88
GRC
.337008
BEL
ISL
AUT
PAK
GBR
SWE
LKA
ISR
MEX
COL
FIN
TUR
SLV
JOR
NOR
HUN
CYP
MLT
MDA
DNK
PER
IDN
MAR
IND
USA
ZWE
KOR
TUN
ARG
SGP
CRI
BHR
SVN
DEU
BOL
KAZ
THA
CHL
LVA
MUS
CHE
EST
UKR
NET
DOM
e( SIN33_A X)
ESP
SVK
LUX
CAN
POL
AUS
ZAF
FRA
ITA
-.547786
-1.24938
2.18988
e( SIZE X )
36
Bottom Line
  • Original sin is not merely a problem of country
    policies (one need not deny the relevance of
    these, of course).
  • It is also a problem with the operation of the
    international system (given transactions costs, a
    world of heterogeneous countries, and network
    effects that lock in the status quo).
  • Redemption therefore requires international
    action to overcome the inertia in the system.

37
Original Sin The Pain, the Mystery And the Road
to Redemption
Barry Eichengreen, Ricardo Hausmann Ugo
Panizza UC Berkeley, Harvard, and IDB
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