Do Local Currency Bond Markets Enhance Financial Stability? Some Empirical Evidence

Abstract

It is widely believed that local currency bond markets (LCBMs) can promote financial stability in emerging markets. In this article, we empirically test such conventional wisdom by analyzing and comparing six measures of financial vulnerability of emerging markets during two episodes of financial stress - global financial crisis and taper tantrum. We find that emerging markets, which experienced greater expansion of their LCBMs between the two episodes, experienced a greater improvement in financial stability, indicating a stabilizing role of LCBMs. Our evidence indicates that a gradual expansion of bank loans but not stock market development may also contribute to financial stability.