The global environment for emerging market economy (EME) bond markets has changed dramatically over the past few decades. Local currency bond markets (LCBMs) have developed especially in EMEs with low inflation stronger institutions and well defined creditor rights (see Burger and Warnock 2003 2006 Eichengreen and Luengnaruemitchai 2006 Claessens Klingebiel and Schmukler 2007). Some EMEs have been able to borrow globally in their local currency which enhances financial stability by ameliorating the currency mismatches that were at the core of past crises (Goldstein and Turner 2004). However large inflows of foreign investment can be problematic as most extreme capital flow episodes are driven by debt flows (Forbes and Warnock 2013) credit booms lead to crises (Mendoza and Terrones 2008 Gourinchas and Obstfeld 2012 Schularick and Taylor 2012) and large foreign investment flows into LCBMs can complicate the tasks of EME policymakers by appreciating real exchange rates fanning asset price bubbles and intensifying lending booms.
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