Government Bonds in Domestic and Foreign Currency: The Role of Institutional Factors

This paper studies how institutional factors affect the size and currency composition of government bonds for a large sample of economies. Important for the debate on limiting financial crises, we find that less flexible exchange rate regimes are associated with larger foreign currency bond markets, suggesting countries either aim to signal their commitment to a fixed exchange rate regime or face moral hazard from international bailouts. We also find evidence that bigger economies with wider domestic investor bases have relatively larger domestic currency and smaller foreign currency bond markets. And foreign investor demand is mainly geared to foreign currency bonds.