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Original Sin

Original Sin

The Road to Redemption

Chapter:
(p.266) 10 Original Sin
Source:
Other People's Money
Author(s):
Barry Eichengreen, Ricardo Hausmann
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226194578.003.0011

This chapter proposes the creation of a synthetic unit of account in which claims on a diversified group of emerging-market economies can be denominated, together with steps by the international financial institutions to develop a liquid market in claims denominated in this unit. As this new unit conquers space in the global portfolio, it will become possible for emerging-market borrowers to issue claims denominated in the underlying currencies and to place them on international markets. The result will be a more efficient international diversification of risks and a reduction in financial fragility. The World Bank has attempted to promote the development of insurance markets for terms-of-trade risk. The chapter's proposal is one more attempt, in this spirit, to help to complete incomplete financial markets.

Keywords:   synthetic unit, emerging-market economies, international financial institutions, liquid market, claims, World Bank, insurance markets, terms-of-trade risk, financial markets

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