LOCAL CURRENCY BOND MARKETS - NATIONAL BUREAU OF ECONOMIC RESEARCH doc

NBER WORKING PAPER SERIES

LOCAL CURRENCY BOND MARKETS

John D. Burger

Francis E. Warnock

Working Paper 12552

http://www.nber.org/papers/w12552

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue

Cambridge, MA 02138

September 2006

Burger is Associate Professor at the Sellinger School of Business and Management at Loyola College in

Maryland. Warnock is Associate Professor at the Darden Graduate School of Business at the University of

Virginia. The authors thank Thomas Jans and Denis Petre for invaluable assistance with data and Jillian

Faucette, Sara Holland, and Alex Rothenberg for research assistance. We also thank for helpful comments

an anonymous referee, Morris Goldstein, Bill Helkie, Olivier Jeanne, Steve Kamin, Ross Levine, Ugo

Panizza, Vincent Reinhart, Charles Thomas, Joachim Voth, Jon Wongswan, and seminar participants at

Berkeley Workshop on Global Balances and Asian Financial Markets, CEPR/Gerzensee Conference on

International Capital Flows, Darden Conference on Investing in Emerging Markets, IF Monday Workshop,

IMF Research Seminar, Loyola College, Towson University, Trinity College International Bond and Debt

Market Integration Conference, and University of North Carolina. All errors are our own. John Burger

acknowledges support from the Sellinger School Junior Sabbatical Program. Warnock thanks the Darden

School Foundation for generous support. The views expressed herein are those of the author(s) and do not

necessarily reflect the views of the National Bureau of Economic Research.

©2006 by John D. Burger and Francis E. Warnock. All rights reserved. Short sections of text, not to exceed

two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is

given to the source.

Local Currency Bond Markets

John D. Burger and Francis E. Warnock

NBER Working Paper No. 12552

September 2006

JEL No. F30, G15, O16

ABSTRACT

We analyze the development of 49 local bond markets. Our 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 upon

foreign-currency debt. Rather, by improving policy performance and strengthening institutionsthey

may develop local currency bond markets, reduce their currencymismatch, and lessen the likelihood

of future crises.

John D. Burger

Loyola College in Maryland

4501 N. Charles Street

Baltimore MD 21210-2699

[email protected]

Francis E. Warnock

Darden Business School

University of Virginia

Charlottesville, VA 22906-6550

and NBER

[email protected]