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ERC WORKING PAPERS

Original Sin Mystery Trinity and Unequal Blessings

Deniz Arinsoy and Erdal Özmen

Abstract:
We investigate whether the fact that most countries cannot borrow internationally in their own currencies, referred to as “original sin” by Eichengreen and Hausmann (1999), may remain as a “mystery” when an alternative variable set and estimation procedure are taken into account. Our results suggest that flexible exchange rates and strong macroeconomic policy stance with sound institutions are necessary but not sufficient for redemption from original sin. Original sin appears to be persistent and determined also by the variables which are beyond the sole control of individual countries. Consequently, redemption from it and satisfying the blessed trinity of international currency, flexible exchange rates and sound institutions requires a new international financial system allowing complete markets for all currencies meeting the necessary conditions.

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2004

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