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Other People’s Money

Debt Denomination and Financial Instability in Emerging Market Economies

Recent crises in emerging markets have been heavily driven by balance-sheet or net-worth effects. Episodes in countries as far-flung as Indonesia and Argentina have shown that exchange rate adjustments that would normally help to restore balance can be destabilizing, even catastrophic, for countries whose debts are denominated in foreign currencies. Many economists instinctually assume that developing countries allow their foreign debts to be denominated in dollars, yen, or euros because they simply don’t know better.

Presenting evidence that even emerging markets with strong policies and institutions experience this problem, Other People’s Money recognizes that the situation must be attributed to more than ignorance. Instead, the contributors suggest that the problem is linked to the operation of international financial markets, which prevent countries from borrowing in their own currencies. A comprehensive analysis of the sources of this problem and its consequences, Other People’s Money takes the study one step further, proposing a solution that would involve having the World Bank and regional development banks themselves borrow and lend in emerging market currencies.


"Other People’s Money asks why some countries issue debt mostly in a foreign currency and therefore expose their balance sheets to the ebbs and flows of international finance. The essays approach the subject from multiple angles and are sure to be of interest to policymakers and sophisticated practitioners alike. Barry Eichengreen and Ricardo Hausmann wrap it up with a creative proposal that will no doubt stimulate lots of further discussion. The book is a must for those who care about instability in global finance."

Arminio Fraga | Arminio Fraga

Table of Contents

Introduction: Debt Denomination and Financial Instability in Emerging Market Economies
Barry Eichengreen and Ricardo Hausmann
1. The Pain of Original Sin
Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza
2. Must Original Sin Cause Macroeconomic Damnation?
Luis Felipe Céspedes, Roberto Chang, and Andrés Velasco
3. A Fiscal Perspective on Currency Crises and "Original Sin"
Giancarlo Corsetti and Bartosz Mackowiak
4. Original Sin, Balance-Sheet Crises, and the Roles of International Lending
Olivier Jeanne and Jeromin Zettelmeyer
5. How Original Sin Was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions, 1800-2000
Michael D. Bordo, Christopher M. Meissner, and Angela Redish
6. Old Sins: Exchange Clauses and European Foreign Lending in the Nineteenth Century
Marc Flandreau and Nathan Sussman
7. Why Do Emerging Economies Borrow in Foreign Currency?
Olivier Jeanne
8. Why Do Countries Borrow the Way They Borrow?
Marcos Chamon and Ricardo Hausmann
9. The Mystery of Original Sin
Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza
10. Original Sin: The Road to Redemption
Barry Eichengreen and Ricardo Hausmann
List of Contributors

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