The Original Sin and Exchange Rate Dynamics: Panel Cointegration Evidence

Abstract

Developing country governments are often forced to issue debt in a foreign currency or commit the "original sin". The "original sin", regardless of exchange rate regime, exacerbates debt problems for these countries. Consequently, this paper investigates the relationship between US dollar denominated government debt and exchange rate movements using unbalanced panel data co-integration techniques on 87 low and middle income countries over the period 1960 to 2006. Our findings suggests that exchange rate Granger-causes the stock of foreign currency denominated debt, however, there is no bidirectional causality.