“Original Sin,” Balance Sheet Crises, and the Roles of International Lending
IMF Working Papers, December 1, 2002
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- “Original Sin,” Balance Sheet Crises, and the Roles of International Lending
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Bibliographic details
- Authors: Jeromin Zettelmeyer, Olivier D Jeanne
- Published: December 1, 2002
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451875638.001
Summary and core findings
- Presents a stylized framework that encompasses a variety of "balance sheet approaches" to currency crises suggested in the literature.
- Common theme: currency and maturity mismatches in private sector balance sheets constrain the capacity of monetary and fiscal policies to deal with self-fulfilling capital account crises.
- These balance sheet mismatches generate a role for international crisis lending.
- International lending can be used to:
- back domestic last-resort lending to banks, or
- loosen fiscal constraints.
- Conditional result: Provided they have a sound fiscal position in normal times, this can make countries immune to self-fulfilling crises.
Policy implications and roles for international lending
- International lending serves as a mechanism to address limitations of domestic monetary and fiscal responses when private sector balance sheets exhibit currency and maturity mismatches.
- Two practical uses of international lending highlighted:
- Support for domestic last-resort lending to banks to mitigate banking-sector runs or liquidity shortages arising from balance sheet mismatches.
- Fiscal backstopping to relax fiscal constraints that would otherwise prevent effective crisis response.
- Under the framework, maintaining a sound fiscal position in normal times is central to leveraging international lending to prevent self-fulfilling crises.
Content in this bundle
- "Original Sin," Balance Sheet Crises, and the Roles of International Lending - WP/02/234