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Inflation Targeting and Country Risk : An Empirical Investigation

Author/Editor: Armand Fouejieu | Scott Roger
Authorized for Distribution: January 23, 2013
Electronic Access: Free Full Text (PDF file size is 1,136KB)
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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.
Order a print copy
Series: Working Paper No. 13/21
Subject(s): Inflation targeting | Risk premium | Monetary policy | Economic models
    Published:   January 23, 2013        
    ISBN/ISSN:   9781475554717/1018-5941   Format:   Paper
    Stock No:   WPIEA2013021   Pages:   30
    Price:   US$18.00
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