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Sovereign Debt Risk in Emerging Countries: Does Inflation Targeting Adoption Make Any Difference?

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  • Weneyam Hippolyte Balima

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

  • Jean-Louis Combes

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

  • Alexandru Minea

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

Abstract

Based on a sample of 38 emerging countries, we find that inflation targeting (IT) adoption improves sovereign debt risk. However, we show that IT adoption effectiveness is sensitive to several structural characteristics, such as the phase of the business cycle, the fiscal stance, and the level of development. In addition, the measure of the risk, namely ratings (rating agencies) or bond yield spreads (markets), as well as the form of IT (full-fledged or partial) is equally crucial for the effects of IT adoption on sovereign debt risk. Thus, our paper provides valuable insights for IT implementation as a device for improving emerging market economies’ access to international financial markets for financing long-term investment projects and supporting potential economic growth.

Suggested Citation

  • Weneyam Hippolyte Balima & Jean-Louis Combes & Alexandru Minea, 2015. "Sovereign Debt Risk in Emerging Countries: Does Inflation Targeting Adoption Make Any Difference?," Working Papers halshs-01128239, HAL.
  • Handle: RePEc:hal:wpaper:halshs-01128239
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01128239v2
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    Keywords

    Inflation targeting; Sovereign debt ratings; Government bond yield spreads; Emerging markets; Propensity scores matching;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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