This paper develops an analytical framework to explore how financial sector characteristics shape domestic debt dynamics in emerging market economies. Our analysis suggests that the more competitive the banking sector and the more liquid and deeper the deposit market, the better would be the conditions in the public securities market. Our results also reveal that the lower the financial depth, the greater the scale of private sector credits that are crowded-out by public borrowing. To the extent that credit availability is associated with improved productivity and better output performance, the lack of financial depth in emerging market countries implies that extensive domestic borrowing in these countries may have consequences far beyond the concern with fiscal sustainability. As such, our results higlight the importance of developing domestic debt markets for financial and macroeconomic stability.
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Paper provided by Department of Economics, University of York in its series Discussion Papers with number
08/11.
Length: Date of creation: May 2008 Date of revision: Handle: RePEc:yor:yorken:08/11
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Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
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