direct consequence of original sin is to make the domestic financial become fragile. Because if there is currency mismatch, the currency depreciation, rising borrowing costs, is easy to fall into financial difficulties, the companies might go bankrupt. If by the fault of the currency period with rising interest rates, borrowing costs will rise. Therefore, interest rates or exchange rates, a slight fluctuation, companies may face deteriorating business environment, even in the face of bankruptcy, so the financial system is fragile. International lenders feel the depreciation of the signs, it will demand repayment, or the rapid withdrawal of funds for, so the financial crisis. Reasons for the mismatch of currency and maturity, because the company can not these foreign currency-denominated debt write-off of domestic financial markets are not fully exposed the company's risk. Another great contribution of the
original sin to save way
original sin theory that balance sheet effects of exchange rate changes. Companies borrowed foreign currency on the balance sheet of the embodiment of debit foreign currency, local currency of the credit. If the exchange rate changes, currency devaluation liabilities increased. External borrowing balance, appear insolvent world pie network information , the balance sheet deterioration, the enterprise may be the brink of bankruptcy. If the interest rate changes, interest rates rise, the burden on businesses increase the enterprise overwhelmed collapse. Therefore, both businesses and governments are reluctant to float of the currency, the government chose a fixed exchange rate as a last resort. If you are experiencing speculative attacks World pipe network reported that the world's steel pipe network to provide the world's steel pipe network editor , the Government can not use the exchange rate tool does not use interest rate instruments to withstand shocks to defend the currency. Incomplete financial markets in developing countries, so choose a fixed or floating exchange rate system will have problems, the Government can not take the initiative to choose the exchange rate regime.
then how to solve the original sin problem? The original sin theory that the best way is to implement the U.S. dollar, long-term borrowing will not appear a problem. Because there is no exchange rate, exchange rate risk does not exist. Hausmann pointed out that the dollarization of the yen will eliminate risk of the borrower, the lower real interest rates to encourage domestic savings, promote financial deepening, and can also provide a credible nominal anchor. However, this solution has a problem, the lack of a lender of last resort.
role oforiginal sin theory
original sin theory refers to the domestic currency (local currency) can not be used for international borrowing (foreign banks and domestic financial institutions can not use the currency loans), even in the domestic market nor can the local currency long-term borrowing. Incomplete domestic financial markets, a country's domestic investment is not a currency mismatch is a maturity mismatch. Specifically, borrow foreign currency with local currency, or foreign currency; or borrow short with long, so there will be a problem of liquidity. A mismatch is not only because of the domestic currency is not convertible, but not entirely due to the country's international financial markets, because even if a country's currency is freely convertible, but companies are not long-term loans in the domestic market, is still possible by foreign currency for domestic construction, this situation is very common in developing countries.
The Meaning oforiginal sin