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Financial stability and local currency bond markets


  • Bank for International Settlements


Introduction Local currency bond markets can help financial stability by reducing currency mismatches and lengthening the duration of debt. Such markets also help economic efficiency by generating market-determined interest rates that reflect the opportunity costs of funds at different maturities. The absence of such markets can lead borrowers to take risky financing decisions that create balance sheet vulnerabilities. Such balance sheet weaknesses played a key role in virtually every major financial crisis affecting the emerging market economies (EMEs) since the early 1980s. This report demonstrates that several major EMEs have effectively addressed this problem during the past decade. Nevertheless, operational risks inevitably arise in a transitional period when nascent markets still lack those features that help the more mature markets to work well even in volatile conditions. This report therefore examines several important challenges in ensuring that comparatively new bond markets function in ways that contribute best to financial stability and economic progress.

Suggested Citation

  • Bank for International Settlements, 2007. "Financial stability and local currency bond markets," CGFS Papers, Bank for International Settlements, number 28.
  • Handle: RePEc:bis:biscgf:28

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    References listed on IDEAS

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    Cited by:

    1. Küçük, Ugur N., 2009. "Emerging Market Local Currency Bond Market, Too Risky to Invest?," MPRA Paper 21878, University Library of Munich, Germany.
    2. Axel Lindner & Alexander Ludwig, 2009. "A simple macro model of Original Sin based on optimal price setting under incomplete information," International Economics and Economic Policy, Springer, vol. 6(4), pages 345-359, December.
    3. Bank for International Settlements, 2008. "Monetary and financial stability implications of capital flows in Latin America and the Caribbean," BIS Papers, Bank for International Settlements, number 43.
    4. Domanski, Dietrich & Turner, Philip, 2011. "The Great Liquidity Freeze: What Does It Mean for International Banking?," ADBI Working Papers 291, Asian Development Bank Institute.
    5. Zhang, Yuewen, 2010. "Sovereign Risk Management in Recession: The Cases of Sweden and China," MPRA Paper 23364, University Library of Munich, Germany.
    6. Serge Jeanneau & Camilo E Tovar, 2008. "Financial stability implications of local currency bond markets: an overview of the risks," BIS Papers chapters,in: Bank for International Settlements (ed.), New financing trends in Latin America: a bumpy road towards stability, volume 36, pages 65-87 Bank for International Settlements.
    7. Peter Aling & Shakill Hassan, 2012. "No-Arbitrage One-Factor Models Of The South African Term Structure Of Interest Rates," South African Journal of Economics, Economic Society of South Africa, vol. 80(3), pages 301-318, September.
    8. Jaramillo, Laura & Weber, Anke, 2013. "Bond yields in emerging economies: It matters what state you are in," Emerging Markets Review, Elsevier, vol. 17(C), pages 169-185.
    9. Cappiello, Lorenzo & Mehl, Arnaud, 2007. "Uncovered interest parity at distant horizons: evidence on emerging economies & nonlinearities," Working Paper Series 801, European Central Bank.
    10. Bank for International Settlements, 2009. "Capital flows and emerging market economies," CGFS Papers, Bank for International Settlements, number 33.
    11. Camilo E Tovar & Myriam Quispe-Agnoli, 2008. "New financing trends in Latin America," BIS Papers chapters,in: Bank for International Settlements (ed.), New financing trends in Latin America: a bumpy road towards stability, volume 36, pages 1-14 Bank for International Settlements.
    12. Sweta Saxena & Agustin Villar, 2008. "Hedging instruments in emerging market economies," BIS Papers chapters,in: Bank for International Settlements (ed.), Financial globalisation and emerging market capital flows, volume 44, pages 71-87 Bank for International Settlements.
    13. Tony Latter, 2008. "What Future for the Hong Kong Dollar Corporate Bond Market?," Working Papers 192008, Hong Kong Institute for Monetary Research.
    14. Amadou N Sy, 2007. "Local Currency Debt Markets in the West African Economic and Monetary Union," IMF Working Papers 07/256, International Monetary Fund.

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