Consumption Baskets and Currency Choice in International Borrowing
Most emerging markets do not borrow much internationally in their own currency, although doing that has been argued as an attractive insurance mechanism. This phenomenon, commonly labeled "the original sin", has mostly been interpreted as...
| Main Authors: | , |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
|
| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20111103142914 http://hdl.handle.net/10986/3636 |
| id |
okr-10986-3636 |
|---|---|
| recordtype |
oai_dc |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
ACCELERATOR AGGREGATE CONSUMPTION ASSET POSITION ASSETS BAILOUT BALANCE SHEET BENCHMARK BILL BOND BOND HOLDERS BOND MARKET BOND MARKETS BOND RETURN BONDS BORROWING COUNTRY BUDGET CONSTRAINT BUDGET CONSTRAINTS BUSINESS CYCLE CAPITAL ACCUMULATION CAPITAL FLOWS CASH HOLDINGS CLAIMANTS COMPETITIVE MARKET CONSUMPTION BASKET CONSUMPTION BASKETS CONSUMPTION DECLINE COUNTRY RISK CREDIT MARKETS CURRENCY CURRENCY COMPOSITION CURRENCY EXPOSURES CURRENT ACCOUNT CURRENT ACCOUNT IMBALANCES DEBT DEBT DENOMINATION DEBT MARKET DEPRECIATION DEVALUATIONS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT POLICY DOLLAR BOND DOLLAR BONDS DOLLAR DEBT DOLLAR PRICE DOMESTIC CREDIT DOMESTIC CURRENCIES DOMESTIC CURRENCY DOMESTIC ECONOMY DOMESTIC MARKET DOMESTIC MONETARY POLICY DOMESTIC WORKERS ECONOMIC CONDITIONS ECONOMIC RESEARCH ELASTICITY ELASTICITY OF SUBSTITUTION EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET ECONOMIES EMERGING MARKETS EMPLOYMENT EQUATIONS EQUILIBRIUM EQUILIBRIUM CONDITIONS EXCESS RETURN EXCHANGE RATE EXCHANGE RATES EXOGENOUS RATE EXPENDITURES EXTERNAL BORROWING EXTERNAL DEBT EXTERNALITIES EXTERNALITY FINANCIAL CRISES FINANCIAL EXCHANGE FINANCIAL FRAGILITY FINANCIAL INSTABILITY FOREIGN CURRENCY FOREIGN DEBT FOREIGN INCOME FOREIGN INVESTOR FOREIGN INVESTORS FOREIGN LENDERS FOREIGN MARKETS GDP HEDGES HOLDING HOLDINGS IMPLICIT CONTRACT IMPLICIT CONTRACTS IMPORTS INCOME SHOCKS INCOMPLETE MARKETS INFLATION INSTRUMENT INSURANCE INSURER INTEREST RATE INTERNATIONAL BANK INTERNATIONAL BORROWING INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL FLOWS INTERNATIONAL CURRENCY INTERNATIONAL DEBT INTERNATIONAL DEBT MARKETS INTERNATIONAL DIVERSIFICATION INTERNATIONAL ECONOMICS INTERNATIONAL FINANCE INTERNATIONAL PRICE LABOR DEMAND LABOR MARKET LABOR SUPPLY LACK OF CREDIBILITY LEVY LOAN LOAN MARKET LOCAL CURRENCIES LOCAL CURRENCY MACROECONOMICS MARKET STRUCTURES MIDDLE INCOME COUNTRIES MONETARY POLICY MONEY HOLDING MONEY HOLDINGS MONEY SUPPLY MORAL HAZARD MUTUAL FUNDS NEGATIVE SHOCK NOMINAL WAGE OPEN ECONOMY POLITICAL ECONOMY PORTFOLIO PORTFOLIO CHOICE PORTFOLIO CHOICES PORTFOLIO HOLDINGS PORTFOLIOS PRIVATE CREDIT PRODUCTION FUNCTION PRODUCTION FUNCTIONS PRODUCTION STRUCTURE PRODUCTIVITY RANDOM VARIABLES REAL EXCHANGE RATE REAL SHOCK REAL SHOCKS REAL WAGES REPAYMENTS RETURN RISK AVERSE RISK PREMIUM RISK SHARING SHARE OF CAPITAL SMALL COUNTRIES SMALL COUNTRY SMALL ECONOMY SOCIAL RISKS SOURCE OF UNCERTAINTY STANDARD DEVIATION STANDARD DEVIATIONS STEADY STATE STEADY STATE LEVEL STICKY PRICES STICKY WAGES SUPPLIERS SUPPLY SHOCK TOTAL OUTPUT TRADABLE GOOD TRADABLE GOODS UTILITY FUNCTION VOLATILITIES VOLATILITY WAGES WEALTH WORLD DEVELOPMENT INDICATORS WORLD INTEREST RATE |
| spellingShingle |
ACCELERATOR AGGREGATE CONSUMPTION ASSET POSITION ASSETS BAILOUT BALANCE SHEET BENCHMARK BILL BOND BOND HOLDERS BOND MARKET BOND MARKETS BOND RETURN BONDS BORROWING COUNTRY BUDGET CONSTRAINT BUDGET CONSTRAINTS BUSINESS CYCLE CAPITAL ACCUMULATION CAPITAL FLOWS CASH HOLDINGS CLAIMANTS COMPETITIVE MARKET CONSUMPTION BASKET CONSUMPTION BASKETS CONSUMPTION DECLINE COUNTRY RISK CREDIT MARKETS CURRENCY CURRENCY COMPOSITION CURRENCY EXPOSURES CURRENT ACCOUNT CURRENT ACCOUNT IMBALANCES DEBT DEBT DENOMINATION DEBT MARKET DEPRECIATION DEVALUATIONS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT POLICY DOLLAR BOND DOLLAR BONDS DOLLAR DEBT DOLLAR PRICE DOMESTIC CREDIT DOMESTIC CURRENCIES DOMESTIC CURRENCY DOMESTIC ECONOMY DOMESTIC MARKET DOMESTIC MONETARY POLICY DOMESTIC WORKERS ECONOMIC CONDITIONS ECONOMIC RESEARCH ELASTICITY ELASTICITY OF SUBSTITUTION EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET ECONOMIES EMERGING MARKETS EMPLOYMENT EQUATIONS EQUILIBRIUM EQUILIBRIUM CONDITIONS EXCESS RETURN EXCHANGE RATE EXCHANGE RATES EXOGENOUS RATE EXPENDITURES EXTERNAL BORROWING EXTERNAL DEBT EXTERNALITIES EXTERNALITY FINANCIAL CRISES FINANCIAL EXCHANGE FINANCIAL FRAGILITY FINANCIAL INSTABILITY FOREIGN CURRENCY FOREIGN DEBT FOREIGN INCOME FOREIGN INVESTOR FOREIGN INVESTORS FOREIGN LENDERS FOREIGN MARKETS GDP HEDGES HOLDING HOLDINGS IMPLICIT CONTRACT IMPLICIT CONTRACTS IMPORTS INCOME SHOCKS INCOMPLETE MARKETS INFLATION INSTRUMENT INSURANCE INSURER INTEREST RATE INTERNATIONAL BANK INTERNATIONAL BORROWING INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL FLOWS INTERNATIONAL CURRENCY INTERNATIONAL DEBT INTERNATIONAL DEBT MARKETS INTERNATIONAL DIVERSIFICATION INTERNATIONAL ECONOMICS INTERNATIONAL FINANCE INTERNATIONAL PRICE LABOR DEMAND LABOR MARKET LABOR SUPPLY LACK OF CREDIBILITY LEVY LOAN LOAN MARKET LOCAL CURRENCIES LOCAL CURRENCY MACROECONOMICS MARKET STRUCTURES MIDDLE INCOME COUNTRIES MONETARY POLICY MONEY HOLDING MONEY HOLDINGS MONEY SUPPLY MORAL HAZARD MUTUAL FUNDS NEGATIVE SHOCK NOMINAL WAGE OPEN ECONOMY POLITICAL ECONOMY PORTFOLIO PORTFOLIO CHOICE PORTFOLIO CHOICES PORTFOLIO HOLDINGS PORTFOLIOS PRIVATE CREDIT PRODUCTION FUNCTION PRODUCTION FUNCTIONS PRODUCTION STRUCTURE PRODUCTIVITY RANDOM VARIABLES REAL EXCHANGE RATE REAL SHOCK REAL SHOCKS REAL WAGES REPAYMENTS RETURN RISK AVERSE RISK PREMIUM RISK SHARING SHARE OF CAPITAL SMALL COUNTRIES SMALL COUNTRY SMALL ECONOMY SOCIAL RISKS SOURCE OF UNCERTAINTY STANDARD DEVIATION STANDARD DEVIATIONS STEADY STATE STEADY STATE LEVEL STICKY PRICES STICKY WAGES SUPPLIERS SUPPLY SHOCK TOTAL OUTPUT TRADABLE GOOD TRADABLE GOODS UTILITY FUNCTION VOLATILITIES VOLATILITY WAGES WEALTH WORLD DEVELOPMENT INDICATORS WORLD INTEREST RATE Bengui, Julien Nguyen, Ha Consumption Baskets and Currency Choice in International Borrowing |
| geographic_facet |
The World Region The World Region |
| relation |
Paper is funded by the Knowledge for Change
Program (KCP),Policy Research working paper ; no. WPS 5870 |
| description |
Most emerging markets do not borrow much
internationally in their own currency, although doing that
has been argued as an attractive insurance mechanism. This
phenomenon, commonly labeled "the original sin",
has mostly been interpreted as evidence of the
countries' inability to borrow in domestic currency
from abroad. This paper provides a novel explanation for
that phenomenon: not that countries are unable to borrow
abroad in their currency, they might not need to do so. In
the model, the small prevalence of external borrowing in
domestic currency arises as an equilibrium outcome, despite
the absence of exogenous frictions or limits on market
participation. The equilibrium outcome is driven by the fact
that domestic and foreign lenders have differential
consumption baskets. In particular, a large part of domestic
lenders' consumption basket is denominated in domestic
currency whereas all of foreign lenders' is in dollars.
A depreciation of domestic currency, which tends to occur in
bad times, is therefore less harmful to domestic savers than
to foreign investors. This makes domestic lenders require a
lower premium than foreign lenders on domestic currency
debt. For plausible calibrations, this consumption basket
effect can induce foreign investors to pull out of the
domestic currency debt market. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Bengui, Julien Nguyen, Ha |
| author_facet |
Bengui, Julien Nguyen, Ha |
| author_sort |
Bengui, Julien |
| title |
Consumption Baskets and Currency Choice in International Borrowing |
| title_short |
Consumption Baskets and Currency Choice in International Borrowing |
| title_full |
Consumption Baskets and Currency Choice in International Borrowing |
| title_fullStr |
Consumption Baskets and Currency Choice in International Borrowing |
| title_full_unstemmed |
Consumption Baskets and Currency Choice in International Borrowing |
| title_sort |
consumption baskets and currency choice in international borrowing |
| publishDate |
2012 |
| url |
http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20111103142914 http://hdl.handle.net/10986/3636 |
| _version_ |
1764387545248956416 |
| spelling |
okr-10986-36362021-04-23T14:02:11Z Consumption Baskets and Currency Choice in International Borrowing Bengui, Julien Nguyen, Ha ACCELERATOR AGGREGATE CONSUMPTION ASSET POSITION ASSETS BAILOUT BALANCE SHEET BENCHMARK BILL BOND BOND HOLDERS BOND MARKET BOND MARKETS BOND RETURN BONDS BORROWING COUNTRY BUDGET CONSTRAINT BUDGET CONSTRAINTS BUSINESS CYCLE CAPITAL ACCUMULATION CAPITAL FLOWS CASH HOLDINGS CLAIMANTS COMPETITIVE MARKET CONSUMPTION BASKET CONSUMPTION BASKETS CONSUMPTION DECLINE COUNTRY RISK CREDIT MARKETS CURRENCY CURRENCY COMPOSITION CURRENCY EXPOSURES CURRENT ACCOUNT CURRENT ACCOUNT IMBALANCES DEBT DEBT DENOMINATION DEBT MARKET DEPRECIATION DEVALUATIONS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT POLICY DOLLAR BOND DOLLAR BONDS DOLLAR DEBT DOLLAR PRICE DOMESTIC CREDIT DOMESTIC CURRENCIES DOMESTIC CURRENCY DOMESTIC ECONOMY DOMESTIC MARKET DOMESTIC MONETARY POLICY DOMESTIC WORKERS ECONOMIC CONDITIONS ECONOMIC RESEARCH ELASTICITY ELASTICITY OF SUBSTITUTION EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET ECONOMIES EMERGING MARKETS EMPLOYMENT EQUATIONS EQUILIBRIUM EQUILIBRIUM CONDITIONS EXCESS RETURN EXCHANGE RATE EXCHANGE RATES EXOGENOUS RATE EXPENDITURES EXTERNAL BORROWING EXTERNAL DEBT EXTERNALITIES EXTERNALITY FINANCIAL CRISES FINANCIAL EXCHANGE FINANCIAL FRAGILITY FINANCIAL INSTABILITY FOREIGN CURRENCY FOREIGN DEBT FOREIGN INCOME FOREIGN INVESTOR FOREIGN INVESTORS FOREIGN LENDERS FOREIGN MARKETS GDP HEDGES HOLDING HOLDINGS IMPLICIT CONTRACT IMPLICIT CONTRACTS IMPORTS INCOME SHOCKS INCOMPLETE MARKETS INFLATION INSTRUMENT INSURANCE INSURER INTEREST RATE INTERNATIONAL BANK INTERNATIONAL BORROWING INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL FLOWS INTERNATIONAL CURRENCY INTERNATIONAL DEBT INTERNATIONAL DEBT MARKETS INTERNATIONAL DIVERSIFICATION INTERNATIONAL ECONOMICS INTERNATIONAL FINANCE INTERNATIONAL PRICE LABOR DEMAND LABOR MARKET LABOR SUPPLY LACK OF CREDIBILITY LEVY LOAN LOAN MARKET LOCAL CURRENCIES LOCAL CURRENCY MACROECONOMICS MARKET STRUCTURES MIDDLE INCOME COUNTRIES MONETARY POLICY MONEY HOLDING MONEY HOLDINGS MONEY SUPPLY MORAL HAZARD MUTUAL FUNDS NEGATIVE SHOCK NOMINAL WAGE OPEN ECONOMY POLITICAL ECONOMY PORTFOLIO PORTFOLIO CHOICE PORTFOLIO CHOICES PORTFOLIO HOLDINGS PORTFOLIOS PRIVATE CREDIT PRODUCTION FUNCTION PRODUCTION FUNCTIONS PRODUCTION STRUCTURE PRODUCTIVITY RANDOM VARIABLES REAL EXCHANGE RATE REAL SHOCK REAL SHOCKS REAL WAGES REPAYMENTS RETURN RISK AVERSE RISK PREMIUM RISK SHARING SHARE OF CAPITAL SMALL COUNTRIES SMALL COUNTRY SMALL ECONOMY SOCIAL RISKS SOURCE OF UNCERTAINTY STANDARD DEVIATION STANDARD DEVIATIONS STEADY STATE STEADY STATE LEVEL STICKY PRICES STICKY WAGES SUPPLIERS SUPPLY SHOCK TOTAL OUTPUT TRADABLE GOOD TRADABLE GOODS UTILITY FUNCTION VOLATILITIES VOLATILITY WAGES WEALTH WORLD DEVELOPMENT INDICATORS WORLD INTEREST RATE Most emerging markets do not borrow much internationally in their own currency, although doing that has been argued as an attractive insurance mechanism. This phenomenon, commonly labeled "the original sin", has mostly been interpreted as evidence of the countries' inability to borrow in domestic currency from abroad. This paper provides a novel explanation for that phenomenon: not that countries are unable to borrow abroad in their currency, they might not need to do so. In the model, the small prevalence of external borrowing in domestic currency arises as an equilibrium outcome, despite the absence of exogenous frictions or limits on market participation. The equilibrium outcome is driven by the fact that domestic and foreign lenders have differential consumption baskets. In particular, a large part of domestic lenders' consumption basket is denominated in domestic currency whereas all of foreign lenders' is in dollars. A depreciation of domestic currency, which tends to occur in bad times, is therefore less harmful to domestic savers than to foreign investors. This makes domestic lenders require a lower premium than foreign lenders on domestic currency debt. For plausible calibrations, this consumption basket effect can induce foreign investors to pull out of the domestic currency debt market. 2012-03-19T18:05:58Z 2012-03-19T18:05:58Z 2011-11-01 http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20111103142914 http://hdl.handle.net/10986/3636 English Paper is funded by the Knowledge for Change Program (KCP),Policy Research working paper ; no. WPS 5870 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Publications & Research :: Policy Research Working Paper The World Region The World Region |