Inflation Targeting and Country Risk: An Empirical Investigation
IMF Working Papers, January 23, 2013
Source details
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- Inflation Targeting and Country Risk: An Empirical Investigation
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Bibliographic details
- Authors: Armand P Fouejieu, Scott Roger
- Published: January 23, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475554717.001
Purpose and hypothesis
- Purpose: Estimate how adoption of inflation targeting (IT) affects spreads and country risk premia.
- Hypothesis: 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.
- Context: Motivated by the sovereign debt crisis in Europe and the role of country risk premia as a link between countries’ fiscal and external balances, financial conditions and monetary policy.
Key findings
- IT reduces the risk premium:
- Reduction occurs both through the adoption of the IT regime and through the observed track record in stabilizing inflation.
- Implication: Greater policy predictability and more stable long-term inflation under IT are associated with lower country risk premia.
Subject areas and keywords
- 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