Does inflation targeting reduce sovereign risk? Further evidence

•Many countries have adopted inflation targeting (IT) regimes to build policy credibility.•We use propensity score matching to analyse whether adopting IT impacts on sovereign risk premia.•We find that IT reduces sovereign risk premia in IT-adopting countries.•We conclude that IT reduces the probability of default and with it the risk premium on debt.

We examine whether adopting an inflation-targeting regime helps reduce sovereign risk premia in a sample of 64 advanced and developing countries for the period 1985-2012. We address the self-selection problem of policy adoption by applying a variety of propensity score matching methods. The results provide evidence that inflation targeting lowers sovereign risk.