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Inflation Surge and Sovereign Borrowing: The Role of Policy Practices in Strengthening Sovereign Resilience

Author

Listed:
  • Joshua Aizenman

    (USC University Park
    NBER)

  • Huanhuan Zheng

    (National University of Singapore (NUS))

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 toward 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.

Suggested Citation

  • Joshua Aizenman & Huanhuan Zheng, 2024. "Inflation Surge and Sovereign Borrowing: The Role of Policy Practices in Strengthening Sovereign Resilience," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(4), pages 1347-1385, December.
    • Handle: RePEc:pal:imfecr:v:72:y:2024:i:4:d:10.1057_s41308-023-00228-5
    DOI: 10.1057/s41308-023-00228-5
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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