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The authors would like to thank Herman Kamil, Paolo Mauro, Anna Ilyina, Arnaud Mehl, Philip Turner, and Julien Reynaud for their comments on the first draft of this paper.
See Isard (2005) for a recent review of the debates on what emerging market countries can do to reduce their vulnerability to financial crises, as well as a number of general directions for systemic reform. The various channels by which currency and maturity mismatches in balance sheets can generate or magnify crises are reviewed in Jeanne and Zettelmeyer (2005).
The World Bank collects data on the external debt of the 136 countries that report public and publicly guaranteed debt under the Debtor Reporting System (DRS). These data form the basis for the Global Development Finance (GDF) data set.
To be precise, this is what Eichengreen and Hausmann defined as the international dimension of original sin. Eichengreen and Hausmann and their followers have also defined a domestic version of original sin for which we see little evidence in the data. We shall come back to that point.
Although this paper is part of a research agenda that focuses on domestic reforms, we believe that reforming the international debt market could yield significant benefits, too. Our point is simply that the empirical research on international reform has a less diverse cross-country experience to rely on.
The only information it provides on the structure of debt is a breakdown by residual maturity (more or less than one year). The BIS data have been used by Claessens, Klingebiel, and Schmukler (2003) and Eichengreen and Luengnaruemitchai (2004) to study the development of domestic bonds markets.
They belong to JP Morgan Emerging Markets Bond Index Global (EMBIG), except India, Korea, the Czech Republic, and Israel.
There is one exception to that rule: Chile. For that country, we included the domestic debt of the central bank, because the Central Bank of Chile has issued large amounts of debt on behalf of the government.
Debt with a maturity of exactly five years was counted as medium term, with some exceptions that are explained in Jeanne and Guscina (2006).
The World Bank publishes data on Public and Publicly Guaranteed (PPG) debt, an aggregate that is broader than central government debt, because it includes all the debt issued or guaranteed by the public sector. We were able to fill in most of our template on international debt by using unpublished data collected by the World Bank. (We thank Nevin Fahmy for providing us with those data.) There was one exception, Israel, which does not participate in the World Bank’s Debtor Reporting System, and for which we had to rely on national sources.
Our group of advanced economies is composed of Canada, Japan, France, the United Kingdom and the United States. The source of the data is Missale (1999).
Which they defined as the fact that in emerging market countries “the domestic currency cannot be used to … borrow long-term, even domestically.” Hausmann and Panizza (2003) added a criterion involving the interest rate: for them, the domestic original sin is the fact that most countries “do not borrow in local currency at long maturities and fixed rates even at home.”
Other examples include Argentina (95 percent of its short-term debt was in foreign currency in 1987) and Brazil (54 percent of its short-term debt was indexed in 1986).
From a theoretical point of view the volatility of inflation is more appropriate than the level of inflation as a measure of the risk associated with long-term domestic-currency debt (a high but constant inflation rate will not generate any uncertainty in the real value of the domestic monetary unit). However, the level of inflation is a good proxy for its volatility because the two variables are closely correlated.