The metamorphosis of external vulnerability from ‘original sin’ to ‘original sin redux’: Currency hierarchy and financial globalisation in emerging economies

Abstract

How has financial globalisation changed the nature of external vulnerability of emerging economies? To answer this question, we first present an overview of the changes in international capital flows and cross-border stocks involving emerging economies from the 1970s to the COVID-19 crisis, and then identify relevant recent shifts in financial globalisation. We link the concepts of financialisation, subordinated financial integration and currency hierarchy, extending the latter to consider the most recent features of financial globalisation. To better understand the metamorphosis of these economies’ vulnerabilities, we deploy a stylised balance sheet analysis. We find the occurrence of the phenomenon of ‘original sin’ during financial internationalisation, while in more recent times of financial globalisation the diversification of financial flows and investors, and the increase of securities denominated in domestic currency have created additional channels of vulnerability, labelled as ‘original sin redux’. We call for capital account regulation targeting these new complex vulnerabilities.