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Local Currency Bond Market Development and Currency Stability amid Market Turmoil

Author

Listed:
  • Kim, Cheonkoo

    (Korea Chamber of Commerce and Industry)

  • Park, Donghyun

    (Asian Development Bank)

  • Park, Jungsoo

    (Sogang University)

  • Tian, Shu

    (Asian Development Bank)

Abstract

This study investigates how development of the local currency (LCY) bond market brings stability in the financial market. The analysis is based on annual economy panel data set for 1989–2020. The main findings are as follows. First, exchange rate volatility is lower during crisis periods if an economy has a more developed LCY bond market. Second, a greater share of LCY bonds and a greater share of bonds with long-term maturities have a stabilizing effect on exchange rate volatility during normal times. Lastly, a developed LCY bond market can serve as a buffer against monetary policy shocks emanating from the United States. The empirical evidence in this study implies that emerging economies need to consider designing policies to bolster development of LCY bond markets.

Suggested Citation

  • Kim, Cheonkoo & Park, Donghyun & Park, Jungsoo & Tian, Shu, 2023. "Local Currency Bond Market Development and Currency Stability amid Market Turmoil," ADB Economics Working Paper Series 688, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0688
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    More about this item

    Keywords

    local currency bond market; exchange rate volatility; currency mismatch; maturity mismatch; financial crisis;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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