Debauchery and Original Sin: The Currency Composition of Sovereign Debt

Charles Engel, Jung Jae Park

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)


We present a model that accounts for the "mystery of original sin"and the surge in local-currency borrowing by emerging economies in the recent decade. We quantitatively investigate the currency composition of sovereign debt in the presence of two types of limited enforcement frictions arising from a government's monetary and debt policy: strategic currency debasement and default on sovereign debt. Local-currency debt obligations act as a better consumption hedge against income shocks than foreign-currency debt because their real value can be affected by monetary policy. However, this provides a government with more temptation to deviate from disciplined monetary policy, thus restricting borrowing in local currency more than in foreign currency. Our model predicts that a country with a less credible monetary policy borrows mainly in foreign currency as a substitute for monetary credibility. An important extension demonstrates that in the presence of an expectational Phillips curve, local-currency debt improves the ability of monetary policymakers to commit.

Original languageEnglish
Pages (from-to)1095-1144
Number of pages50
JournalJournal of the European Economic Association
Issue number3
Publication statusPublished - 2022 Jun 1

Bibliographical note

Funding Information:
Charles Engel acknowledges support from the National Science Foundation, grant # 151782 and 1918340. JungJae Park is grateful for the financial support from the Ministry of Education of Singapore (Academic Research Fund Tier 1 Program NO:FY2017-FRC2-011) and Yonsei university (New Faculty Research Seed Funding Grant (2021)). This paper has benefited from comments at numerous conferences and seminars. We thank Manuel Amador, Yan Bai, Javier Bianchi, Galina Hale, Dmitry Murkhin, and Pablo Ottonello for comments and discussion.

Publisher Copyright:
© 2022 The Author(s) 2022. Published by Oxford University Press on behalf of European Economic Association.

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)


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