University of Southern California
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Kaprielian (KAP) Hall, 300
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Institutional Affiliation: University of Southern California
NBER Working Papers and Publications
|June 2019||Inflation and Exchange Rate Targeting Challenges Under Fiscal Dominance|
with Joshua Aizenman, Yothin Jinjarak: w25996
Countries have increased significantly their public-sector borrowing since the Global Financial Crisis. In this context, we document several potential fiscal dominance effects during 2000-2017 under Inflation Targeting (IT), and non-IT regimes. Higher ratios of public debt-to-GDP are associated with lower policy interest rates in Advanced Economies. In Emerging Market economies under non-IT regimes, composed mostly of exchange rate targeters, the interest rate effect of higher public debt is non-linear and depends both on the ratio of foreign-currency to total public debt, and on the ratio of hard-currency debt to GDP. For these Emerging Market economies under non-IT regimes, real exchange rate depreciation and international reserves accumulation are significantly associated with higher in...