The effect of inflation targeting and financial openness on currency composition of sovereign international debt

Olena Ogrokhina () and Cesar Rodriguez

Journal of International Money and Finance, 2019, vol. 97, issue C, 1-18

Abstract: This paper analyzes the joint effect of inflation targeting and capital account openness in promoting changes to the currency composition of sovereign international debt in developing countries. First, using difference-in-differences in combination with entropy balancing, we offer empirical evidence that the adoption of inflation targeting together with high capital account openness can significantly reduce the reliance on foreign currency denominated sovereign international debt. We find that financially integrated inflation-targeting countries have 11 percentage points lower foreign currency shares in their sovereign debt compared to non-targeting countries. Second, we determine the threshold level of financial openness that countries need to attain before they see the full benefits of inflation targeting. Third, the joint effect of inflation targeting and capital account openness significantly increases three years after the policy implementation. Our results are robust to alternative specifications which include instrumental variables to account for the endogeneity of the policy.

Keywords: Inflation targeting; Capital account openness; International sovereign debt; Currency composition; Developing countries (search for similar items in EconPapers)
JEL-codes: F02 F34 F41 G15 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560619300191
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:97:y:2019:i:c:p:1-18

DOI: 10.1016/j.jimonfin.2019.05.004

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().