Inflation targeting, International debt, Currency composition, International economics -- Developing countries
This paper analyzes the inflation targeting experience of developing countries as an effective monetary policy framework to promote changes in the currency composition of their international debt. Using matching with difference-in-differences to address the self-selection bias, we find that in inflation targeting has led to a 3-6 percentage point reduction in the foreign currency share of international debt in targeting countries when compared to non-targeting countries. Furthermore, from the analysis of the individual currency shares, we find that inflation targeting has contributed to a 10 percentage points lower US dollar share in international debt in targeting countries compared to non-targeting countries; while the effects on the euro and other foreign currencies shares are negligible. This not only provides evidence that the structural features of international financial markets matter, but also that monetary policy can help developing countries reduce their reliance on foreign currency debt.
Ogrokhina, Olena and Rodriguez, Cesar M., "The Role of Inflation Targeting in Debt Denomination in Developing Countries" (2016). Economics Faculty Publications and Presentations. 76.