Local Currency Bond Market Development and Currency Stability amid Market Turmoil

Cheonkoo Kim, Donghyun Park, Jungsoo Park () and Shu Tian ()
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Jungsoo Park: Sogang University
Shu Tian: Asian Development Bank

No 688, ADB Economics Working Paper Series from 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.

Keywords: local currency bond market; exchange rate volatility; currency mismatch; maturity mismatch; financial crisis (search for similar items in EconPapers)
JEL-codes: E22 G31 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2023-07-03
New Economics Papers: this item is included in nep-fdg, nep-mon and nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:ris:adbewp:0688

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