Inflation and exchange rate targeting challenges under fiscal dominance since the Global Crisis

a column by Rashad Ahmed, Joshua Aizenman and Yothin Jinjarak for VOX: CEPR’s Policy Portal

Countries have significantly increased their public-sector borrowing since the Global Crisis.

This column documents several potential fiscal dominance effects during 2000-17 under inflation targeting and non-inflation-targeting regimes. A higher ratio of public debt to GDP is associated with lower policy interest rates in advanced economies. In emerging economies under non-inflation-targeting 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 local currency debt, and on the ratio of hard currency debt to GDP.

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