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Do Local Currency Bond Markets Enhance Financial Stability? Some Empirical Evidence

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  • Donghyun Park
  • Kwanho Shin
  • Shu Tian

Abstract

It is widely believed that local currency bond markets (LCBMs) can promote financial stability in emerging markets. In this article, we empirically test such conventional wisdom by analyzing and comparing six measures of financial vulnerability of emerging markets during two episodes of financial stress – global financial crisis and taper tantrum. We find that emerging markets, which experienced greater expansion of their LCBMs between the two episodes, experienced a greater improvement in financial stability, indicating a stabilizing role of LCBMs. Our evidence indicates that a gradual expansion of bank loans but not stock market development may also contribute to financial stability.

Suggested Citation

  • Donghyun Park & Kwanho Shin & Shu Tian, 2021. "Do Local Currency Bond Markets Enhance Financial Stability? Some Empirical Evidence," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(2), pages 562-590, January.
    • Handle: RePEc:mes:emfitr:v:57:y:2021:i:2:p:562-590
    DOI: 10.1080/1540496X.2019.1696190
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    Cited by:

    1. Park, Cyn-Young & Shin, Kwanho, 2023. "The Development of Local Currency Bond Markets and Uncovered Interest Rate Parity," ADB Economics Working Paper Series 677, Asian Development Bank.

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