Swarupa Ranjan Panigrahi

Capital inflow into local bond markets helps countries with infrastructure financing, funding fiscal deficit, enhancing bond market liquidity, and diversifying investment portfolios globally. This study aims to assess the impact of institutional quality and capital account openness on capital inflow into Asian local bond markets for the period 2002–2023. For reflecting Asian bond markets, seven countries, namely, China, Malaysia, South Korea, Japan, the Philippines, Indonesia, and Thailand, have been considered. The rule of law, regulatory quality, control of corruption, voice & accountability, political stability, and government effectiveness indices are the various proxies considered in this study to measure the different aspects of institutional quality. Further, the Chinn-Ito index is employed to measure capital account openness. Fixed effect, random effect, and pooled data ordinary least squares are employed as different forms of panel data estimation methods in this study. Moreover, Breusch-Pagan LM and Hausman tests are performed to select the most efficient estimation method. This study reveals that the rule of law, regulatory quality, and control of corruption have a positive influence on capital inflow at a 5% significance level and political stability at a 1% significance level. In contrast, capital account openness has a negative impact at a 1% significance level. However, neither voice & accountability nor government effectiveness have a significant influence over capital inflow. These findings suggest improving the rule of law and regulatory quality, creating policies for political stability, stringent acts against corruption, and controlling capital account openness to encourage capital inflow into local bond markets.

Type of the article: Research Article

Abstract
Extensive research has been conducted on the global effects of the US unconventional monetary policy shock on capital flows in emerging markets. However, there is limited empirical evidence on the transmission channels of capital flows in emerging bond markets. This study examines it by analysing capital flows across 45 emerging bond markets from 2009 to 2023. Contemporaneous shock transmission is examined using the contemporaneous impact matrix, and dynamic shock transmission is assessed using the impulse response function of the structural vector autoregression (SVAR) model. All variables in this study are standardised to account for differences in scale within the model. The pairwise correlation coefficient matrix indicates that multicollinearity is not a concern for parameter estimates in this model. The ADF-Fisher Chi-square unit root test result reveals that all variables are stationary in this model. The contemporaneous coefficient matrix results indicate that changes in the US term spread serve as the contemporaneous transmission channel through which US Treasury bond purchase and US MBS purchase shocks positively affect capital flows in emerging bond markets. The impulse response function indicates that changes in the global financial cycle serve as a dynamic transmission channel through which US MBS purchase shocks affect capital flows in emerging bond markets. Moreover, changes in the US mortgage spread serve as the dynamic transmission channel through which US Treasury bond purchases and US MBS purchases affect capital flows in emerging bond markets.

Acknowledgment
The author expresses sincere gratitude to Assistant Professor Dr Nupur Moni Das, Faculty of Management Studies, Sri Sri University, India, for her careful proofreading of the manuscript and her valuable academic insights.