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Impact of Inflation Targeting on External Debt: Evidence from Low-Income Countries

Author

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  • El Ouazzani Hicham

    (Faculty of Economics and Management, Ibn Tofail University, Kénitra, Morocco; Afiliated researcher, Observatory of Economic Francophonie (OEF), Montreal University, Canada)

  • Ouakil Hicham

    (Faculty of Economics and Management, Ibn Tofail University, Kénitra, Morocco)

  • Moustabchir Abdelhamid

    (Faculty of Law, Economics and Social Sciences Aïn Chock, Hassan II University, Casablanca, Morocco)

  • Elhebil Abdelaziz

    (Faculty of Economics and Management, Ibn Tofail University, Kénitra, Morocco)

Abstract

Research background This study explores the impact of inflation targeting on external debt in low-income countries, filling a gap in understanding its effects on debt management in these countries. Purpose Our research aims to determine whether the adoption of inflation targeting can lead to a reduction in external debt for low-income countries, using a robust methodology that accounts for selection bias. Research methodology We use propensity score matching (PSM) to analyse data from 37 low-income countries between 1990 and 2020. Of these countries, 19 have adopted inflation targeting, while 18 have not, enabling a balanced comparison of the two groups. Results Our results indicate that inflation targeting leads to a significant reduction in external debt of 14.561% on average. This substantial reduction is attributed to enhanced monetary credibility and a reduced risk of default on public debt. Novelty This study enriches the literature by providing robust empirical evidence on the beneficial effects of inflation targeting in low-income countries. The study highlights its potential as a debt management tool and emphasises the importance of adapting economic policies to the specific context of each country.

Suggested Citation

  • El Ouazzani Hicham & Ouakil Hicham & Moustabchir Abdelhamid & Elhebil Abdelaziz, 2025. "Impact of Inflation Targeting on External Debt: Evidence from Low-Income Countries," Folia Oeconomica Stetinensia, Sciendo, vol. 25(1), pages 114-136.
  • Handle: RePEc:vrs:foeste:v:25:y:2025:i:1:p:114-136:n:1006
    DOI: 10.2478/foli-2025-0006
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    References listed on IDEAS

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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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