The impact of central bank transparency on debt home and foreign bias

Abstract

This paper examines whether and how central bank transparency affects international bond/debt diversification. Using panel data from 39 countries, we find that central bank transparency reduces debt home bias. Further analysis shows that central bank transparency enhances debt foreign bias. This is consistent with the view that when the central bank is transparent, bondholders will be able to predict the monetary policy instruments that will be used to support price and financial market stability. The findings are robust to difference-in-difference, placebo test, moment-based cluster, mean heterogeneity across time and countries, missingness vs imputation, dynamic generalized method of moments, and fixed difference and fixed effects, our results are robust to quasi-natural. This study shows that bond investors pay attention to the transparency of the central bank which has implications for businesses, investors, researchers, and policymakers, particularly in emerging countries. JEL classification E58,F3, G2, G11,G15