Question

[6 pts] What is the idea of original sin? How does it affect developing countries when they face a devaluation or depreciation of their currency? How does it affect developed countries when they face a devaluation or depreciation of their currency?

Answer 1

Original sin is the term used in economics literature which refers to a situation where most countries are not able to borrow from foreign to their domestic nations. It is a condition where one country is not able to borrow any of the amounts or funds outside the country for the domestic needs.
It affects the developing countries when there is a devaluation and depreciation by affecting the export and import of the country. In the case of depreciation and devaluation the countries, the export will increase and for some reasons it will increase the export of the developing country which will help in there balance of payment surplus. The inability to borrow from abroad for the domestic country is the biggest source for fragility in the financial position. The developing countries get burdened by the original sin and are charged with the additional risk premium at the time of borrowing, which results in bringing them closer to the situation of solvency.