Local Currency Bond Market Development and Currency Stability amid Market Turmoil

Abstract

This study examines the association between local currency (LCY) bond market development and currency stability. Using data from global economies, this study finds that in economies with more developed LCY bond markets, exchange rate volatility is lower during market turmoil. Currency volatility is lowered in bond markets with a greater share of LCY bonds and long-term bonds, even during normal times. The findings suggest that LCY bond market development contributes to financial stability especially during stress times.