Inflation surge and sovereign borrowing : the role of policy practices in strengthening sovereign resilience

Author / Creator

Aizenman, Joshua, author

Available as

Online

Summary

Sovereign borrowing during inflation surges is a litmus test of a government's ability to withstand and navigate macroeconomic shocks. Based on transaction-level bond issuance data, we explore how ...

Sovereign borrowing during inflation surges is a litmus test of a government's ability to withstand and navigate macroeconomic shocks. Based on transaction-level bond issuance data, we explore how sovereign financing strategies respond to inflation surges and how policy practices affect their ability to weather inflation shocks. We find that governments rely more on foreign-currency debt from foreign investors during periods of high inflation. This pattern is particularly prevalent in emerging markets (EMs), especially when the inflation surge is prolonged and severe. We further show that good practices of fiscal discipline, credibly pegged exchange regime, open capital account, and monetary dependence alleviate the need to borrow foreign capital in foreign currency during periods of inflation surges.

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