Global Financial Stability and Local Currency Bond Markets

One factor that arguably could have ameliorated both the emerging market crises of the 1990s and the current global crisis is the development of local currency bond markets. We document and discuss the recent surge in local bond market development, particularly evident in emerging economies where reliance on foreign currency debt—and its concomitant currency mismatches—has been substantially reduced. We also investigate the extent to which countries have been able to borrow internationally in their own currency and find that cross-border participation in local currency bonds is highest in countries where investor-friendly institutions and policies have been established.