The Determinants of 'Domestic' Original Sin in Emerging Market Economies

43 Pages Posted: 15 Dec 2005

See all articles by Arnaud Mehl

Arnaud Mehl

European Central Bank (ECB)

Julien P. M. Reynaud

International Monetary Fund (IMF); Université Paris I Panthéon-Sorbonne

Date Written: December 2005

Abstract

This paper explains why domestic debt composition in emerging economies is risky. It carries out an analysis of the determinants of 'domestic' original sin, which refers to the inability of emerging economies to borrow domestically in local currency, at long maturities and fixed interest rates. The latter is a measure of financial vulnerabilities arising from domestic debt composition, which encompasses maturity mismatches, rollover risk and interest payment contingency. The paper builds on a large dataset compiled by the authors from national sources. It finds that domestic original sin is severe when inflation is lofty, the debt service-to-GDP ratio high, the slope of the yield curve inverted and the investor base narrow. These results suggest that sound macroeconomic policies, attractive long-term yields and policies aimed at widening the investor base are instrumental to reduce domestic debt riskiness and tilt its composition towards safer, long-term, unindexed, local currency instruments.

Keywords: Original sin, domestic debt, emerging economies

JEL Classification: F34, F41, G15

Suggested Citation

Mehl, Arnaud and Reynaud, Julien P. M., The Determinants of 'Domestic' Original Sin in Emerging Market Economies (December 2005). ECB Working Paper No. 560. Available at SSRN: https://ssrn.com/abstract=863946

Arnaud Mehl (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Julien P. M. Reynaud

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Université Paris I Panthéon-Sorbonne ( email )

Maison des Sciences Economiques
106-112, Bd. de l'Hôpital
75647 Paris Cedex 13
France

HOME PAGE: http://team.univ-paris1.fr/teamperso/reynaud/julien.htm

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