Economics at your fingertips  

Inflation Targeting with Sovereign Default Risk

Cristina Arellano, Gabriel Mihalache () and Yan Bai
Additional contact information
Cristina Arellano: Federal Reserve Bank of Minneapolis
Yan Bai: University of Rochester

No 239, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Since the early 2000s, many emerging markets have adopted inflation targeting as their monetary policy, against a background of recurring sovereign debt crises. We develop a framework that integrates inflation targeting monetary policy with sovereign default risk and identify important interactions. Monetary policy alters incentives for international borrowing and sovereign default risk leads to more volatile nominal interest rates, needed to target inflation. We show that this framework replicates the positive co-movements of sovereign interest rate spreads with domestic nominal rates and inflation, a salient feature of emerging markets data. Our framework rationalizes the experience of Brazil during the 2015 downturn, which featured high inflation, high nominal rates, and high sovereign spreads. Our counterfactual experiment suggests that by raising the domestic rate the Brazilian central bank not only reduced inflation but also alleviated the debt crisis.

Date: 2019
References: Add references at CitEc
Citations: Track citations by RSS feed

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default) (2019) Downloads
Working Paper: Inflation Targeting with Sovereign Default Risk (2018) Downloads
Working Paper: Inflation Targeting with Sovereign Default Risk (2018) Downloads
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:

Access Statistics for this paper

More papers in 2019 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

Page updated 2021-01-24
Handle: RePEc:red:sed019:239