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

Weneyam Hippolyte Balima (1) , Jean-Louis Combes (1) , Alexandru Minea (1)

1 CERDI - Centre d'Études et de Recherches sur le Développement International

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.

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

Domaines: Economies et finances

Weneyam Hippolyte Balima, Jean-Louis Combes, Alexandru Minea. Sovereign Debt Risk in Emerging Countries: Does Inflation Targeting Adoption Make Any Difference?. 2015. ⟨halshs-01128239v2⟩