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Inflation Targeting and Country Risk

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  • Armand Fouejieu
  • Scott Roger

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/21.

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Length: 30
Date of creation: 23 Jan 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/21

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Related research

Keywords: Inflation targeting; Risk premium; Monetary policy; Economic models; external debt; inflation rate; effect of inflation; monetary policy framework; monetary policy frameworks; monetary economics; foreign exchange; inflation performance; central bank; monetary framework; monetary fund; high inflation; effects of inflation; monetary policy regime; lower inflation; monetary policy implications; treasury bonds; relative price variability; alternative monetary policy frameworks; macroeconomic performance; optimal monetary policy; foreign currency; monetary policy rules; real value;

References

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  1. Francisco Palomino, 2012. "Bond Risk Premiums and Optimal Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 19-40, January.
  2. Moron, Eduardo & Winkelried, Diego, 2005. "Monetary policy rules for financially vulnerable economies," Journal of Development Economics, Elsevier, vol. 76(1), pages 23-51, February.
  3. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," NBER Working Papers 12876, National Bureau of Economic Research, Inc.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "From Financial Crash to Debt Crisis," NBER Working Papers 15795, National Bureau of Economic Research, Inc.
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Cited by:
  1. Guillermo Escudé, 2013. "A DSGE Model for a SOE with Systematic Interest and Foreign Exchange Policies in Wich Policymakers Exploit the Risk Premium for Stabilization Purposes," BCRA Working Paper Series 201361, Central Bank of Argentina, Economic Research Department.
  2. Lanzafame, Matteo & Nogueira, Reginaldo, 2013. "Inflation targeting and interest rates," MPRA Paper 46153, University Library of Munich, Germany.

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