2023-07-12-亚开行-市场动荡中的本币债券市场发展与货币稳定_30页_622kb

Summary of "Local Currency Bond Market Development and Currency Stability amid Market Turmoil"

Core Content

This working paper explores the relationship between the development of local currency (LCY) bond markets and currency stability, particularly during periods of financial market turmoil. The authors use an annual economy panel dataset from 1989 to 2020 to analyze how LCY bond market development can mitigate exchange rate volatility and enhance financial stability in emerging economies.

Main Findings

• Exchange Rate Stability: A more developed LCY bond market is associated with lower exchange rate volatility, especially during crisis periods.
• Normal Periods: In normal times, a higher share of LCY bonds and a higher proportion of long-term maturity bonds contributes to greater exchange rate stability.
• Monetary Policy Shocks: A developed LCY bond market can act as a buffer against US monetary policy shocks, reducing the impact on exchange rates.
• Empirical Evidence: The study finds that emerging economies benefit from LCY bond market development in terms of financial stability and resilience to external shocks.

Key Information

1. Context and Motivation

• The 1997/98 Asian financial crisis was driven by currency and maturity mismatches, with many Asian economies relying heavily on short-term foreign borrowing.
• The development of LCY bond markets is seen as a way to reduce these mismatches and enhance financial stability by diversifying financing sources and increasing the availability of long-term funding.

2. LCY Bond Market Development in Emerging East Asia

• Over the past 20 years, the LCY bond market in the region has grown significantly, reaching $22.9 trillion by June 2022, up from $218.2 billion in 2000.
• Government LCY bonds dominate the market, accounting for over 60% of the total bond market in 2022.
• The share of LCY bonds in the overall bond market averaged around 90% over the past two decades.

3. Maturity Profile

• The proportion of LCY bonds with tenors greater than 10 years increased from 6.9% in 2000 to 20.7% in the first half of 2022.
• The share of bonds with tenors between 5 and 10 years rose from 27.6% to 32.1%.
• On average, LCY bonds with tenors of 5 years or more accounted for 60.1% of annual LCY bond issuance.

4. Foreign Investor Participation

• A higher share of foreign investors in LCY bond markets can increase financial instability during periods of high financial stress.
• In 2020, Indonesia and Malaysia had the highest foreign holding shares in LCY government bonds.

5. Empirical Approach

• The study uses a fixed-effects panel regression model to estimate the impact of LCY bond market development on exchange rate volatility.
• The dependent variable is the standard deviation of monthly exchange rate changes (against the US dollar) during a year.
• Independent variables include the size of the LCY bond market as a share of GDP, current account balance to GDP ratio, domestic credit to private sector, broad money to total reserves ratio, market capitalization to GDP ratio, inflation rate, capital inflows to GDP ratio, and portfolio liabilities.

6. Crisis Indicators

• The study incorporates indicators for financial crises, including the 1997/98 Asian financial crisis, the global financial crisis, and the COVID-19 pandemic.
• An interaction term between LCY bond market development and crisis indicators is used to assess the varying impact of LCY bond markets during different phases of market turmoil.

7. Policy Implications

• Emerging economies should consider policies to develop LCY bond markets to enhance financial stability and reduce vulnerability to global shocks.
• Developing LCY bond markets can help mitigate the "original sin" problem, where countries struggle to borrow in their own currency.

Structure of the Paper

1. Introduction: Discusses the vulnerability of emerging markets to global shocks and the role of LCY bond markets in enhancing stability.
2. Literature Review: Reviews existing studies on the determinants of LCY bond market development, its impact on financial instability, and its contribution to financial stability.
3. Data and Research Method: Describes the dataset, model specification, and methodology used to analyze the impact of LCY bond markets on exchange rate volatility.
4. Empirical Findings: Presents the results of the analysis, showing the stabilizing effects of LCY bond market development during both normal and crisis periods.

Conclusion

The development of local currency bond markets contributes to financial stability by reducing exchange rate volatility and mitigating the impact of monetary policy shocks. The study emphasizes the importance of developing LCY bond markets to reduce financial fragility and enhance resilience to global financial stress.