 The development of local currency bond markets and uncovered interest rate parityCyn-Young Park () and Kwanho Shin Journal of International Money and Finance, 2025, vol. 154, issue C Abstract: This study examines how the growth of local currency bond markets (LCBM) and the expansion of nonbank financial institutions (NBFI) influence the uncovered interest parity (UIP) condition, based on the actual expectations of market participants in emerging market economies (EMEs). Using data from January 1996 to April 2022, we find a reduction in UIP deviations with the growth of LCBMs and the expansion of NBFIs in EMEs. This progress also brings the dynamics of UIP premiums in these markets closer to those seen in advanced economies. Additionally, in EMEs with a larger size of LCBMs, capital flows exhibit increased sensitivity to UIP premiums. However, despite the development of LCBMs, we find strong evidence of the ’original sin redux’ in both advanced and emerging economies, as evidenced by the increase (or decrease) of gross portfolio debt inflows with an appreciating (or depreciating) exchange rate. Additionally, we find that LCBM advancements amplify the impact of actual exchange rate depreciation, but only in EMEs. Keywords: Uncovered interest parity; Local currency bond markets; Emerging economies; Nonbank financial institutions; Capital inflows (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:154:y:2025:i:c:s0261560625000452 DOI: 10.1016/j.jimonfin.2025.103310 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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