Journal
EMERGING MARKETS FINANCE AND TRADE
Volume 57, Issue 2, Pages 562-590Publisher
ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD
DOI: 10.1080/1540496X.2019.1696190
Keywords
Bonds; local currency bond markets; financial stability; emerging markets; global financial crisis; taper tantrum
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Funding
- Asian Development Bank
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Local currency bond markets (LCBMs) are believed to promote financial stability in emerging markets, and a gradual expansion of bank loans may also contribute to financial stability.
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.
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