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The determinants of "domestic" original sin in emerging market economies

Julien Reynaud () and Arnaud Mehl ()

No 159, Money Macro and Finance (MMF) Research Group Conference 2006 from Money Macro and Finance Research Group

Abstract: This paper explains why domestic debt composition in some emerging economies is risky. To this end, it carries out a systematic analysis of the determinants of the so-called domestic original sin, which refers to the inability of emerging economies to borrow domestically in local currency, at long maturities and fixed interest rates. As such, 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 particularly severe when inflation is lofty, the debt service-to-GDP ration 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 overcome domestic original sin, reduce domestic debt riskiness and tilt its composition towards safer, long-term, unindexed, local currency instruments

Keywords: Original sin; domestic debt; emerging economies (search for similar items in EconPapers)
JEL-codes: F34 F41 G15 (search for similar items in EconPapers)
Date: 2007-02-02
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http://repec.org/mmf2006/up.11903.1154949765.pdf (application/pdf)

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Working Paper: The determinants of "domestic" original sin in emerging market economies (2005) Downloads
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