Internationalisation of emerging market currencies and original sin: Empirical evidence

摘要

This article investigates the impact of the internationalisation 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 measures of internationalisation on the currency structure of debt for a set of emerging market countries. We show the favourable impact of the internationalisation process on original sin for the period 2005-2018 using two different measures with a dynamic panel data empirical analysis. The main determinants are the foreign exchange (FX) turnover of the currencies, the economic size of the issuing country, and the Volatility Index (VIX). In this way, we highlight network effects between the functions of a currency. The tests also highlight the existence of inertia in the use of a currency for financial transactions. Finally, the results provide evidence on the role of derivative instruments in supporting the use of emerging market currencies in bond markets.