Government Bonds In Domestic And Foreign Currency: The Role Of Institutional And Macroeconomic Factors In Developed And Emerging Markets

Abstract

This study examines how the scope and structure of the government bond market are impacted by macroeconomic and institutional variables. Using panel data for 28 developed and emerging economies from 2010 to 2020, several factors were found to be consistently linked to bond markets. In addition to the economic aspect, which has been demonstrated before to influence currency composition, this study suggests that investor bases are significant. Countries with more developed domestic financial systems, as shown by higher levels of bank deposits and stock market capitalization, tend to have greater domestic currency bond markets and less dependence on foreign currency debt. Conversely, the demand from international investors is influenced by the size and proportion of foreign currency bonds. Furthermore, exchange rate regimes that are less flexible are principally accountable for an increased issuance of foreign currency. Additional significant variables encompass inflation, fiscal stress, legal origin, and capital account flexibility