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We thank Julie Kozack, Mahmood Pradhan, Daria Zakharova, Francisco Vazquez, and Mousse Sow for useful comments and suggestions on an earlier draft. We also thank participants at the IMF seminar at the Ministry.
The opposite has been true for offshore issuance by the financial and non-financial corporate sectors which have taken advantage of depressed yields and ample liquidity to issue foreign exchange (FX) debt.
The paper does not address whether higher volatility in local currency yields (likely also reflected in swings in the exchange rate—if it is flexible) is detrimental to growth.
The 5-year bonds are chosen over other maturities to maximize sample size and to capture the most widely traded paper in the secondary market.
We tested the disaggregated components (i.e. foreign bank and non-bank participation) individually but since coefficients are not significantly different from one another we use aggregate foreign holdings.
Countries in the sample are feely floating or managed floating with no pre-determined path for the exchange rate.
When global financial shock variables are accounted for, controlling for time dummies becomes redundant.
Rose and Spiegel (2009) discuss why geographical distance could matter for international finance. Empirical evidence suggests that distance exacerbates information symmetries. We use their data in our estimation. We control for the volatility of the forward bilateral exchange rate (as a proxy for market characteristics and expectations) in each auxiliary equation predicting the geographical-based measure of foreign holding and investor base concentration.
Our prior is that the structure of the investor base would not directly impact the level or the volatility of the yield (as does foreign participation) but rather serves to amplify or dampen global financial shocks. Hence, we include the concentration interacted with the global financial shock in this specification and not on its own as previously.
As the financial shock is expressed in levels and we are interested in gauging the effects in basis points, we keep the dependent variable expressed in levels of the yield rather than standard deviations (the volatility of the yield).
This interval is chosen to allow sufficient data on the left and on the right sides of the range.
We do not have data on the holders of local currency debt for a comprehensive number of EMs to investigate the impact of a more diversified investor base on local currency asset markets.
We rely on methodology in González et al. (2005). First we test for homogeneity against the PSTR alternative, and choose (i) between the logistic and logistic quadratic specification for the transition function, and (ii) the transition variable. Second, we use nonlinear least squares to obtain parameter estimates, once the data have been demeaned (Hansen, 1999; González et al., 2005). Third, misspecification tests are applied to check the validity of the model and determine the number of regimes.