Working Paper: NBER ID: w12552
Authors: John D. Burger; Francis E. Warnock
Abstract: We analyze the development of 49 local bond markets. Our main finding is that policies and laws matter: Countries with stable inflation rates and strong creditor rights have more developed local bond markets and rely less on foreign-currency-denominated bonds. The results suggest that "original sin" is a misnomer. Emerging economies are not inherently dependent upon foreign-currency debt. Rather, by improving policy performance and strengthening institutions they may develop local currency bond markets, reduce their currency mismatch, and lessen the likelihood of future crises.
Keywords: local currency bond markets; creditor rights; financial stability; emerging economies
JEL Codes: F30; G15; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stable monetary and fiscal policies (E63) | Bond market development (G10) |
| Poor inflation performance (E31) | Reliance on foreign currency debt (F34) |
| Stronger legal institutions (O17) | More extensive local currency bond markets (G15) |
| Improved policy performance (D78) | Development of local currency bond markets (G15) |
| Strengthened institutions (O17) | Reduced reliance on foreign currency debt (F34) |
| Better historical inflation performance (E31) | More extensive local currency bond markets (G15) |