Other People's Money : Debt Denomination and Financial Instability in Emerging Market Economies

Recent crises in emerging markets have been heavily driven by balance-sheet or net-worth effects. Episodes in countries as far-flung as Indonesia and Argentina have shown that exchange rate adjustments that would normally help to restore balance can be destabilizing, even catastrophic, for countries whose debts are denominated in foreign currencies. Many economists instinctually assume that developing countries allow their foreign debts to be denominated in dollars, yen, or euros because they simply don't know better. Presenting evidence that even emerging markets with strong policies and institutions experience this problem, Other People's Money recognizes that the situation must be attributed to more than ignorance. Instead, the contributors suggest that the problem is linked to the operation of international financial markets, which prevent countries from borrowing in their own currencies. A comprehensive analysis of the sources of this problem and its consequences, Other People's Money takes the study one step further, proposing a solution that would involve having the World Bank and regional development banks themselves borrow and lend in emerging market currencies. "Recent crises in emerging markets have been heavily driven by balance-sheet or net-worth effects. Episodes in countries as far-flung as Indonesia and Argentina have shown that exchange rate adjustments that would normally help to restore balance can be destabilizing, even catastrophic, for countries whose debts are denominated in foreign currencies. Many economists instinctually assume that developing countries allow their foreign debts to be denominated in dollars, yen, or euros because they simply don't know better." "Presenting evidence that even emerging markets with strong policies and institutions experience this problem, Other People's Money recognizes that the situation must be attributed to more than ignorance. Instead, the contributors suggest that the problem is linked to the operation of international financial markets that prevent countries from borrowing in their own currencies. A comprehensive analysis of the sources of this problem and its consequences, Other People's Money takes the study one step further by proposing a solution that would involve having the World Bank and regional development banks themselves borrow and lend in emerging market currencies." "Painstakingly researched, this volume combines case studies, mathematical analysis, historical analysis, and public policy to provide students, economists, policymakers, and others with a state-of-the-art overview of the debt denomination problem and its potential solutions."--Jacket Contents Acknowledgments Introduction: Debt Denomination and Financial Instability in Emerging Market Economies • Barry Eichengreen and Ricardo Hausmann 1 The Pain of Original Sin • Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza 2 Must Original Sin Cause Macroeconomic Damnation? • Luis Felipe Céspedes, Roberto Chang, and Andrés Velasco 3 A Fiscal Perspective on Currency Crises and Original Sin • Giancarlo Corsetti and Bartosz Mac ́kowiak 4 Original Sin, Balance-Sheet Crises, and the Roles of International Lending • Olivier Jeanne and Jeromin Zettelmeyer 5 How Original Sin Was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions, 1800–2000 • Michael D. Bordo, Christopher M. Meissner, and Angela Redish 6 Old Sins: Exchange Clauses and European Foreign Lending in the Nineteenth Century • Marc Flandreau and Nathan Sussman 7 Why Do Emerging Economies Borrow in Foreign Currency? • Olivier Jeanne 8 Why Do Countries Borrow the Way They Borrow? • Marcos Chamon and Ricardo Hausmann 9 The Mystery of Original Sin • Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza 10 Original Sin: The Road to Redemption • Barry Eichengreen and Ricardo Hausmann List of Contributors Index

Recent crises in emerging markets have been heavily driven by balance-sheet or net-worth effects. Episodes in countries as far-flung as Indonesia and Argentina have shown that exchange rate adjustments that would normally help to restore balance can be destabilizing, even catastrophic, for countries whose debts are denominated in foreign currencies. Many economists instinctually assume that developing countries allow their foreign debts to be denominated in dollars, yen, or euros because they simply don't know better.

Presenting evidence that even emerging markets with strong policies and institutions experience this problem, Other People's Money recognizes that the situation must be attributed to more than ignorance. Instead, the contributors suggest that the problem is linked to the operation of international financial markets, which prevent countries from borrowing in their own currencies. A comprehensive analysis of the sources of this problem and its consequences, Other People's Money takes the study one step further, proposing a solution that would involve having the World Bank and regional development banks themselves borrow and lend in emerging market currencies.

Annotation Recent crises in emerging markets have been heavily driven by balance-sheet or net-worth effects. Episodes in countries as far-flung as Indonesia and Argentina have shown that exchange rate adjustments that would normally help to restore balance can be destabilizing, even catastrophic, for countries whose debts are denominated in foreign currencies. Many economists instinctually assume that developing countries allow their foreign debts to be denominated in dollars, yen, or euros because they simply don't know better. Presenting evidence that even emerging markets with strong policies and institutions experience this problem, Other People's Moneyrecognizes that the situation must be attributed to more than ignorance. Instead, the contributors suggest that the problem is linked to the operation of international financial markets, which prevent countries from borrowing in their own currencies. A comprehensive analysis of the sources of this problem and its consequences, Other People's Moneytakes the study one step further, proposing a solution that would involve having the World Bank and regional development banks themselves borrow and lend in emerging market currencies Many economists instinctivally assume that developing countries allow their foreign debts to be denominated in dollars, yen, or euros because they simply don't know any better. This book recognizes that the situation must be attributed to more than ignorance.