Original Sin - Analysing Its Mechanics and a proposed Remedy in a Simple Macroeconomic Model

Axel Lindner

No 11/2006, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: This paper analyses the problem of "original sin" (the fact that the currency of an emerging market economy usually cannot be used to borrow abroad) in a simple thirdgeneration model of currency crises. The approach differs from alternative frameworks by explicitly modeling the price setting behavior of firms if prices are sticky and the future exchange rate is uncertain. Monetary policy optimally trades off effects on price competitiveness and on debt burdens of firms. It is shown that the proposal by Eichengreen and Hausmann of creating an artificial basket currency as denominator of debt is attractive as a provision against contagion.

Keywords: Erbsünde; Währungskrisen; original sin; currency crises (search for similar items in EconPapers)
JEL-codes: F34 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:iwh-11-06

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