The Banking Sector, Government Bonds, and Financial Intermediation: The Case of Emerging Market Countries

Abstract

This paper develops an analytical framework to explore how financial-sector characteristics shape the terms and the scale of public borrowing in emerging market economies. We find that the more competitive the banking sector and the more liquid and deeper the deposit market, the better are conditions in the public securities market. We also show that the greater the central bank independence, the higher the cost of public borrowing. Furthermore, our results suggest that, in countries where banks rely significantly on foreign currency financing, the greater the government's reliance on bank lending, the greater is its exposure to exchange rate risk.