Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152994
Authors: 
Mehl, Arnaud
Reynaud, Julien
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 560
Abstract: 
This paper explains why domestic debt composition in emerging economies is risky. It carries out an analysis of the determinants of ‘domestic’ original sin, which refers to the inability of emerging economies to borrow domestically in local currency, at long maturities and fixed interest rates. The latter is a measure of financial vulnerabilities arising from domestic debt composition, which encompasses maturity mismatches, rollover risk and interest payment contingency. The paper builds on a large dataset compiled by the authors from national sources. It finds that domestic original sin is severe when inflation is lofty, the debt service-to-GDP ratio high, the slope of the yield curve inverted and the investor base narrow. These results suggest that sound macroeconomic policies, attractive long-term yields and policies aimed at widening the investor base are instrumental to reduce domestic debt riskiness and tilt its composition towards safer, long-term, unindexed, local currency instruments.
Subjects: 
domestic debt
emerging economies
Original sin
JEL: 
F34
F41
G15
Document Type: 
Working Paper

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