The Original Sin Redux: A Model Based Evaluation

This paper studies the "Original sin redux" hypothesis in a two-country New Keynesian-DSGE framework. Emerging economies have been able to overcome the "original sin" and issue debt in local currency in recent years. We show that while this helps mitigate the vulnerability to external shocks, it does not completely eliminate it, as long as the currency mismatch remains on the balance sheet of lenders that are financially constrained (original sin redux). We study some policy recommendations such as sterilized foreign exchange interventions and increasing the domestic investor base that can help reduce the external vulnerability emanating from foreign borrowing.