Local Currency Bond Markets

Abstract

This paper analyzes the development of 49 local bond markets. The main finding is that policies and laws matter: countries with stable inflation rates and strong creditor rights have more developed local bond markets and rely less on foreign-currency-denominated bonds. The results suggest that “original sin” is a misnomer. Emerging economies are not inherently dependent on foreign currency debt. Rather, by improving policy performance and strengthening institutions, they may develop local currency bond markets, reduce their currency mismatch, and lessen the likelihood of future crises.