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

The development of government bond markets and, in particular, their currency composition have recently received much interest, partly because of their perceived links with financial crises. This paper studies determinants of the size and currency composition of government bond markets for a panel of developed and developing countries. We find that countries with larger economies, greater domestic investor bases and more flexible exchange rate regimes have larger domestic currency bond markets, while smaller economies rely more on foreign currency bonds. Better institutional frameworks and macroeconomic fundamentals enhance both domestic currency bond markets and increase countries’ ability to issue foreign currency bonds, while they raise the share of foreign exchange bonds.