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


  • For very useful comments, we thank Mark Aguiar, Menzie Chinn, Ricardo Hausmann, Olivier Jeanne, Eduardo Levy Yeyati, Ron McKinnon, Ugo Panizza, Frank Warnock, Dariusz Wojcik, two anonymous referees, and participants at presentations held at Stanford University, Kiel Institute of World Economics, and the AEA Meetings (San Diego). We are also grateful to Juan Carlos Gozzi and Guillermo Noguera for outstanding research assistance, and to Denis Petre from the Bank for International Settlements for the data. This paper was revised while Schmukler was visiting the IMF.

Schmukler: The World Bank, MSN MC3-301, 1818 H Street, NW, Washington, DC 20433, USA. Tel.: (202) 458-4167; Fax: (202) 522-3518; E-mail:


In contrast to some recent research, this paper finds that institutional and macroeconomic factors are related to the depth and currency composition of government bond markets. Using panel data for developed and emerging economies, we find several factors to be systematically associated with bond markets. Aside from economic size (already shown to affect the currency composition), this paper shows that investor bases matter. Economies with deeper domestic financial systems (measured by bank deposits and stock market capitalization) have larger domestic currency bond markets and issue less foreign currency debt, whereas foreign investor demand is positively related to the size and share of foreign currency bonds. Moreover, less flexible exchange rate regimes are associated with more foreign currency issuance. Other relevant variables include inflation, fiscal burden, legal origin, and capital account openness.

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