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

El Ouazzani Hicham (), Ouakil Hicham (), Moustabchir Abdelhamid () and Elhebil Abdelaziz ()
Additional contact information
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

Folia Oeconomica Stetinensia, 2025, vol. 25, issue 1, 114-136

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.

Keywords: inflation targeting; external debt; low-income countries; propensity score matching (search for similar items in EconPapers)
JEL-codes: C14 E52 F34 O11 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.2478/foli-2025-0006 (text/html)

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:vrs:foeste:v:25:y:2025:i:1:p:114-136:n:1006

DOI: 10.2478/foli-2025-0006

Access Statistics for this article

Folia Oeconomica Stetinensia is currently edited by Waldemar Tarczyński

More articles in Folia Oeconomica Stetinensia from Sciendo
Bibliographic data for series maintained by Peter Golla ().