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Inflation Targeting and Country Risk: An Empirical Investigation

  • Armand Fouejieu
  • Scott Roger

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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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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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
  2. Eduardo Moron & Diego Winkelried, 2002. "Monetary Policy Rules for Financially Vulnerable EconomieEd," Macroeconomics 0205001, EconWPA.
  3. 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.
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