Miriam T omasuolo Stefano Passalacqua

1. The original sin[On the determinants of Original Sin: an empirical investigation Ricardo Hausmann , Ugo Panizza (2003) ] Miriam Tomasuolo Stefano Passalacqua

2. Whatis the original sin??? The inability to borrow in the owncurrencyinternationallyand athomeat long maturities and fixedrates.

3. Framing The Original Sin Sovereigndebt: debt which is incurred by governments. It can be divided in foreign and domestic debt. Incentive: Why a country decide to repayhisdebt? Sanctions and reputation DISTORSION: STRUCTURE Remedies: restructuring and relief, creditor coordination, bankruptcyprocedures, role of a international lender (IMF)

4. Whatis the story?

5. 2001 1997 1999 … … … … 1973 1998 1994

9. … And in presence of original sin this led to …

10. Whatis the original sin??? The inability to borrow in the owncurrencyinternationallyand athomeat long maturities and fixedrates.

11. International component

12. How theymeasureit?OSIN = Max [ 1 – (securities in currency/securitiesissued by country) ; 0 ] From 0 (good) to 1 (bad)Source:BISDataset, 91 countries, 1993-2001

13. Domestic component Domesticdebt in foreigncurrency Domesticdebt From 0 (good) to 1 (bad) Source : J.P.MORGAN DATASET , 24 COUNTRIES, 2002, 2000, 1998 DSIN =

14. Comparingdomestic and intenational

15. What are the causes?They test sevenhypothesis :1) Level of development2) Monetarycredibility3) Fiscal solvency4) Contractenforcement5) Exchange rate regime6) Political economy7) International factors

16. Data and MethodBIS Dataset, 91 Countries, 1993-2001, J.P.Morgan Dataset , 24 Countries, 1998, 2000, 2002From panel to cross-country datasetTobit model

17. DEPENDENT VARIABLE : OSIN and DSINEXPLANATORY VARIABLES : Proxies for eachHypothesisDUMMIES: Financial centers, Euroland, Otherdeveloped, offshore OSIN (DSIN) = α + ??? + ???*??? + ….

18. Level of developmentHP: Onlycountries with goodistitutions and policiescan borrowinternationally in localcurrencyProxy: LOG GDP per capita, Capital control

19. MonetarycredibilityTHEORY: inflation-prone policiesmanipulate the realvalue of the debt. Lowmonetarycredibilityisassociated to higherinterestrates.Proxy: Average of log inflation (1980-1998)

21. Fiscal solvencyHP: governements with weak fiscal accounts have an incentive to debase the currency in order to erode theirobbligation. Thismakeslessattractive for others to lend in localcurrencyProxy: Debt on gdp and debt on revenueRESULT: no correlation

22. ContractenforcementHP: A poorcontractenforcement reduce the guarantee on the obbligations . Thisleads to reduce the domesticcurrency market.Proxy: Index of rule of law (kaufmann et al. 1999)

23. Exchange rate regimeTHEORY: Is the Fixedparitycredible? Ifitisn’tcrediblenobodywantlend in thiscurrency. Thereis a strong incentive for the speculators.Proxy: index LYS [1,3] (increase with exchange rate rigidity)

24. Political economy THEORY: foreigncreditorswill be reluctant to lend in localcurrencyunlessprotected by a large constituency of localsavers.

25. Proxy: Domestic credit to the private sector;Quantity of moneyas a share of gdp;Foreignliabilities on domestic credit;

26. International factorsHP: Largereconomieshave an advantagebecausetheircurrencies are more liquid. Moreover the transactioncost and the network externalitiesstrengthenthisadvantage.

27. Proxy: Index Size (log gdp,logtrade, log domestic credit)

28. Puttingalltogether

29. The domestic component

30. Whereis the problem?Sample and dataBuilding of indecesReverse causalityEndogeneity

31. Conclusions