Working Paper: NBER ID: w31173
Authors: Joshua Aizenman; Huanhuan Zheng
Abstract: 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 differ between surging and stable inflations and how policy practices affect their ability to weather inflation shocks. We find that governments lean more towards external borrowing in foreign currency during periods of high inflation, in part to reduce borrowing costs. 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 and credibly pegged exchange rate regime alleviate external borrowing in foreign currency amid inflation surges.
Keywords: No keywords provided
JEL Codes: F21; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation shocks (E31) | increased external borrowing (F34) |
| good practices of fiscal discipline (E62) | decreased external borrowing during inflation surges (F65) |
| maintaining a credibly pegged exchange rate (F31) | decreased external borrowing during inflation surges (F65) |
| prolonged high inflation episodes (E31) | increased likelihood of external borrowing (F34) |
| lower monetary policy credibility (E52) | increased likelihood of external borrowing (F34) |
| higher debt burdens (F34) | increased propensity to borrow externally during inflation shocks (F65) |
| higher fiscal deficits (H69) | increased propensity to borrow externally during inflation shocks (F65) |