VOX  CEPR Policy Portal

The interest in the implications of sovereign debt home bias on debt sustainability has been growing. This column presents new evidence on this issue using a sample of advanced and emerging markets. Home bias generally reduces the cost of borrowing for both advanced and emerging markets when debt levels are moderate to high. A worsening of market sentiments diminishes the favourable impact of home bias on the cost of borrowing, particularly for emerging markets. In addition, higher home bias is associated with higher debt levels, and with less responsive fiscal policy.