Redemption or Abstinence? Original Sin, Currency Mismatches and Counter-Cyclical Policies in the New Millennium

The emerging market crises of the 1990s focused the attention of economists on issues of debt composition and particularly currency denomination. Since in bad times the real value of the domestic currency tends to weaken, servicing foreign currency debt becomes more difficult exactly when the capacity to pay is diminished. This makes for riskier debt, less room for counter-cyclical fiscal policies and a monetary policy geared towards currency not output stability.