Do Local Currency Bond Markets Enhance Financial Stability?

30 Pages Posted: 22 Feb 2019

See all articles by Donghyun Park

Donghyun Park

Asian Development Bank - Economic Research

Kwanho Shin

Korea University

Grace Tian

Asian Development Bank

Date Written: October 19, 2018

Abstract

It is widely believed that local currency bond markets (LCBMs) can promote financial stability in developing countries. For instance, they can help mitigate the currency and maturity mismatch that contributed to the outbreak of the Asian financial crisis of 1997–1998. In this paper, we empirically test such conventional wisdom on the stabilizing effect of LCBMs. To do so, we analyze and compare the financial vulnerability of developing countries during two episodes of financial stress global financial crisis and taper tantrum. During the two episodes, we find a negative association between the growth of LCBMs and the degree of currency depreciation in emerging economies. Similar association is found of bank loans but not for the stock market.

Keywords: Asian financial crisis, bonds, currency mismatch, developing countries, financial stability, local currency bond markets, maturity mismatch

JEL Classification: E44, F34, F38, F42, F62

Suggested Citation

Park, Donghyun and Shin, Kwanho and Tian, Shu, Do Local Currency Bond Markets Enhance Financial Stability? (October 19, 2018). Asian Development Bank Economics Working Paper Series No. 563 (October, 2018). Available at SSRN: https://ssrn.com/abstract=3339164 or http://dx.doi.org/10.2139/ssrn.3339164

Donghyun Park (Contact Author)

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Kwanho Shin

Korea University ( email )

1 Anam-dong 5 ka
Sunbuk-Ku, Department of Economics
Seoul 136-701
Korea
82-2-3290-2220 (Phone)
82-2-3290-2719 (Fax)

HOME PAGE: econ.korea.ac.kr/~khshin

Shu Tian

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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