In emerging economies, local-currency bonds dominate government debt and are predominantly held by domestic investors. We develop a model that explains both facts jointly. Domestic investors prefer local-currency bonds because they provide insurance against distortionary taxation. The government exploits this preference: issuing local-currency debt stimulates domestic demand, which lowers default risk. As a result, issuing local-currency debt remains optimal even when it provides no fiscal insurance. Finally, we present empirical evidence from 17 emerging economies consistent with the model predictions.