Can Capital Account Liberalization Lessen Capital Volatility in a Country with ‘Original Sin’?

Asian Economic Papers, Vol. 11, Issue 2, pages 1-22, November 2011

36 Pages Posted: 1 Apr 2013

See all articles by Bokyeong Park

Bokyeong Park

Kyung-Hee University - Graduate School of Pan-Pacific Studies

Jiyoun An

Kyung Hee University

Date Written: February 9, 2012

Abstract

The term "original sin" refers to countries that cannot take out foreign loans that are denominated in its own currency. This study investigates how capital account liberalization affects capital flow volatility in countries with and without original sin. Overall, we find that the level of capital openness increases capital flow volatility, and that countries with original sin experience additional volatility in their capital flows. When the data sample is limited to countries with high institutional quality, the difference remains between the two groups -- confirming that the different effects of capital openness on volatility should be attributed to differences in the international status of currencies rather than in institutional quality. So, emerging economies whose currencies are not internationalized should be more cautious of capital account liberalization.

Keywords: Capital flow volatility, Original sin, Capital account liberalization

JEL Classification: F30, F32

Suggested Citation

Park, Bokyeong and An, Jiyoun, Can Capital Account Liberalization Lessen Capital Volatility in a Country with ‘Original Sin’? (February 9, 2012). Asian Economic Papers, Vol. 11, Issue 2, pages 1-22, November 2011. Available at SSRN: https://ssrn.com/abstract=2240847

Bokyeong Park

Kyung-Hee University - Graduate School of Pan-Pacific Studies ( email )

1 Seochun-ri
Kiheung-eup Yongin-si
Kyunggi-do, 449-701
Korea

Jiyoun An (Contact Author)

Kyung Hee University ( email )

1732 Deogyeong-daero
Giheung-gu
Yongin-si, Gyeonggi-do, Gyeonggi-Do 446-701
Korea, Republic of (South Korea)

HOME PAGE: http://kic.khu.ac.kr/

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