Original sin (economics)

Original sin is a term in economics literature, proposed by Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza in a series of papers to refer to a situation in which "most countries are not able to borrow abroad in their domestic currency."

The name is a reference to the concept of original sin in Christianity.

The original sin hypothesis has undergone a series of changes since its introduction.

The original sin hypothesis was first defined as a situation "in which the domestic currency cannot be used to borrow abroad or to borrow long term even domestically" by Barry Eichengreen and Ricardo Hausmann in 1999. Based on their measure of original sin (shares of home currency-denominated bank loans and international bond debt), they showed that original sin was present in most of the developing economies and independent from histories of high inflation and currency depreciation. However, this early study left the causes of original sin as an open question.

In the second version of the original sin hypothesis, Barry Eichengreen, Ricardo Hausmann and Ugo Panizza in 2002 discarded the domestic element of original sin and redefined (international) original sin as a situation in which most countries cannot borrow abroad in their own currency. They showed that almost all of the countries (except US, Euro area, Japan, UK, and Switzerland) suffered from (international) original sin over time. Eichengreen, et al. concluded that weaknesses of national macroeconomic policies and institutions are not statistically related with original sin and found that the only statistically robust determinant of original sin was country size. Moreover, they claimed that international transaction costs, network externalities, and global capital market imperfections were the main reasons (which are beyond the control of an individual country) of the original sin. Hence, as a solution for the original sin problem, they proposed an international initiative and recommended development of a basket index of emerging-market currencies so that international financial institutions could issue debt denominated in this index until a liquid-market in this index had developed. Burger and Warnock (2003) suggested inclusion of information on domestic bond markets to account for the possibility that foreign investors were holding local-currency emerging market bonds to analyze the determinants of original sin. Using this expanded measure, they showed that emerging markets economies could develop local bond markets (in which they can borrow in domestic currency) and attract global investors with stronger institutions and credible domestic policies. Reinhart, Rogoff and Savastano (2003) criticized the suggested international solution for the original sin problem by claiming that the main problem of emerging market economies is to learn how to borrow less (debt intolerance) rather than learn how to borrow more in their domestic currency.

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