Inflation Targeting and Country Risk: An Empirical Investigation

January 23, 2013

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The sovereign debt crisis in Europe has highlighted the role of country risk premia as a link between countries’ fiscal and external balances, financial conditions and monetary policy. The purpose of this paper is to estimate how adoption of inflation targeting (IT) affects spreads. It is hypothesized that country risk premia for IT countries (especially among emerging market economies) may be lower than for other countries owing to greater policy predictability and more stable long-term inflation. The findings suggest that IT reduces the risk premium, both through adoption of the IT regime, and through the observed track record in stabilizing inflation.

Subject: External debt, Inflation, Inflation targeting, Monetary policy, Monetary policy frameworks, National accounts, Prices, Return on investment

Keywords: adoption of inflation targeting, announcement effect, country risk, country risk premia, country risk risk premium, debt, external debt, Global, Inflation, inflation targeting, inflation targeting country, inflation targeting framework, Monetary policy frameworks, Return on investment, risk premium, WP

Pages:
30
Volume:
2013
DOI:
https://doi.org/10.5089/9781475554717.001
Issue:
021
Series:
Working Paper No. 2013/021
Stock No:
WPIEA2013021
ISBN:
9781475554717
ISSN:
1018-5941

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