Internationalization of Emerging Market Currencies and Original Sin: Empirical evidence of a threshold effect (co-écrit avec Stéphanie Prat)

Présentation de Delphine Lahet - Maître de Conférences - Université de Bordeaux - LAREFI

Dans le cadre du séminaire hebdomadaire du CREM nous accueillons cet jeudi Delphine Lahet (Université de Bordeaux- LAREFI).

Abstract: This article investigates the impact of the internationalization of emerging market currencies on original sin, which is the inability of emerging countries to borrow abroad in local currency. The objective is to assess the role of direct measures (metrics of the fulfillment of international currency functions) and indirect measures (drivers) of internationalization in the currency structure of debt for a set of emerging market countries. For the period 2005-2018, using two different measures of original sin (local currency external debt as a share of total external debt and the total amount issued in local currencies in international markets), which are also measures of the ‘store of value’ function, we show the favorable impact of the internationalization process on original sin with a panel data empirical analysis. The main determinants are the foreign exchange (FX) turnover of the currencies (a direct measure of the function 'means of payment'), the economic size of the issuing country and the VIX. In this way, we highlight network effects between the functions ‘store of value’ and ‘means of payment’. The tests also highlight the existence of inertia in the use of a currency for financial transactions. Finally, the results give evidence on the role of derivative instruments in supporting the use of emerging market currencies in bond markets. Work in progress investigates the existence of a threshold on some variables above which there would be an acceleration in the issuing of local-currency debt and in the purchase by foreign investors.