Speaking to the Markets

This paper examines the effect of IMF staff and executive board announcements on sovereign bond spreads across emerging and developing economies during economic uncertainty. We derive testable predictions from a stylized model in which IMF announcements serve as a signal to ambiguity-averse investors, narrowing their posterior beliefs about macroeconomic parameters and lowering the ambiguity premium in bond pricing. To empirically assess this, we train a large language model to identify and categorize economic signals by topic, assessing both the sentiment and the intensity of their coverage. The analysis yields several key insights. First, IMF announcements exhibit strong interdependencies among topics indicating a holistic approach to economic diagnostics. Second, using a local projection approach, we show that increase in the positivity of an IMF press release’s tone leads to a significant reduction in sovereign spreads in the short term. This effect is more pronounced for countries with higher spreads, larger program size, and for topics such as debt, FX and reserves, and fiscal.