Original sin is a term in economics literature, proposed by Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza in a series of papers to refer to a situation in which "most countries are not able to borrow abroad in their domestic currency.
Based on their measure of original sin (shares of home currency-denominated bank loans and international bond debt), they showed that original sin was present in most of the developing economies and independent from histories of high inflation and currency depreciation.
They showed that almost all countries (except US, Euro area, Japan, UK, and Switzerland) suffered from (international) original sin over time.
Moreover, they claimed that international transaction costs, network externalities, and global capital market imperfections were the main reasons (which are beyond the control of an individual country) for original sin.
[6] Reinhart, Rogoff and Savastano (2003) criticized the suggested international solution for the original sin problem by claiming that the main problem of emerging market economies is to learn how to borrow less (debt intolerance) rather than learn how to borrow more in their domestic currency.
Goldstein and Turner (2003) criticized this by showing that large output losses due to the currency mismatches during financial crises could not be attributed to original sin.
On the other hand, they reported that seven countries, among the 21 emerging countries included in their sample, had low domestic original sin but relatively high international original sin, suggesting that dominant use of local currency in domestic markets is not a sufficient condition for dominant use internationally.
Thus, OSIN2 has the advantage of wider coverage; however, it is a less precise measure of original sin because of data limitations of bank loans.
These measures of original sin suggest that the United States, United Kingdom, Japan, Switzerland (financial centers), and Euroland countries are more successful in issuing their securities in their own domestic currencies relative to developing countries.
Empirical studies mainly focus on a few parameters as being the determinants of the original sin: (i) the level of development, (ii) monetary credibility, (iii) level of debt burden, (iv) the exchange rate regime, (v) slope of the yield curve, and (vi) size of the investor base.
Consequently, governments attempt to reduce debt service costs through inflation, unexpected changes in interest rates, explicit taxation, or outright default.
Empirical studies show that fixed exchange rate regime is the main reason of liability dollarization.
Despite these common weaknesses, emerging and developing economies have been able to attract capital because they have often operated under fixed or pegged exchange rate regimes until the early 2000s.
[14] Generally, an upward-sloping yield curve is associated with higher long-term borrowing to meet investor demand and, hence, lower original sin.
This concept actually indicates the level of financial development which is measured most of the time by a ratio of total domestic credits to GDP.
Finally, a special care to the level of openness which is generally measured by total foreign trade, should be taken into account.