Can Capital Account Liberalization Lessen Capital Volatility in a Country with ‘Original Sin’?

The term "original sin" refers to countries that cannot take out foreign loans that are denominated in its own currency. This study investigates how capital account liberalization affects capital flow volatility in countries with and without original sin. Overall, we find that the level of capital openness increases capital flow volatility, and that countries with original sin experience additional volatility in their capital flows. When the data sample is limited to countries with high institutional quality, the difference remains between the two groups -- confirming that the different effects of capital openness on volatility should be attributed to differences in the international status of currencies rather than in institutional quality. So, emerging economies whose currencies are not internationalized should be more cautious of capital account liberalization