Central bank transparency and sovereign risk ratings: a panel data approach

This paper analyzes the effect of central bank transparency on sovereign risk ratings. We address two channels through which central bank transparency affects sovereign risk ratings: the first is the direct channel, and it occurs due to the reduction of uncertainties regarding monetary policy decisions; the second is an indirect channel, and the transmission of the effect occurs through the inflation rate. We use a sample of 50 countries (where 40 are developing countries) for the period 1998–2014, and panel data methodology. The estimates suggest countries with greater central bank transparency present lower levels of inflation, and better sovereign risk ratings. Governments can raise their sovereign risk ratings by making efforts to raise central bank transparency. The results are observed for the full sample, and for the sample of developing countries.