Macroeconomics, 2nd Edition by Pearson

THE TRADE BALANCE AND EXCHANGE RATES

149

rate attracts hot money and also increases the likelihood of

ORIGINAL

SIN

. When

a national currency cannot be used by local firms or the government to borrow

abroad, it suffers from original sin.

29

In such a situation, investors who find the

country economically promising must borrow in a foreign currency such as the

dollar or borrow short term because the domestic capital market lacks sufficient

depth. When a firm borrows in dollars to finance a project that generates INR, a

subsequent depreciation can lead to bankruptcy. Investments suffer from a cur-

rency mismatch, and when firms see ...