The Credibility Premium

Central bank independence (CBI) is a key institutional feature for price stability, but its role in sovereign debt markets is less understood. This paper examines whether CBI lowers borrowing costs in local-currency sovereign debt markets in emerging and developing economies. Using data for up to 137 countries from 2000--2024, we first reaffirm that stronger CBI substantially reduces inflation and its volatility. We then show that, in normal times, a 0.1-point increase (on a 0–1 scale) in CBI is associated with lower five-year local-currency sovereign yields of 0.6–0.7 percentage points. A decomposition reveals two important mechanisms through which CBI reduces local-currency sovereign yields: lowering near-term risk compensation and compressing the term premium. In addition, we find evidence that this relationship is stronger under inflation-targeting regimes and larger in sub-Saharan Africa, but does not hold during systemic global crises. Finally, using dominance analysis, we show that domestic fundamentals explain more of the variation in yields than global factors. These findings demonstrate that debt markets directly price institutional credibility, offering clear guidance for the design of monetary frameworks.

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Publication Details

Journal
IMF Working Paper
Published
2026-03-01
DOI
https://doi.org/10.5089/9798229040709.001
Primary Topic
Global Financial Crisis and Policies
Type
article
Field-Weighted Citation Impact
0.00
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article

The Credibility Premium

Albert Touna Mama, Adrian Alter, Julia Bersch, Bright Quaye
IMF Working Paper
Global Financial Crisis and Policies
article

The Credibility Premium

Albert Touna Mama, Adrian Alter, Julia Bersch, Bright Quaye
article en

Abstract

Central bank independence (CBI) is a key institutional feature for price stability, but its role in sovereign debt markets is less understood. This paper examines whether CBI lowers borrowing costs in local-currency sovereign debt markets in emerging and developing economies. Using data for up to 137 countries from 2000--2024, we first reaffirm that stronger CBI substantially reduces inflation and its volatility. We then show that, in normal times, a 0.1-point increase (on a 0–1 scale) in CBI is associated with lower five-year local-currency sovereign yields of 0.6–0.7 percentage points. A decomposition reveals two important mechanisms through which CBI reduces local-currency sovereign yields: lowering near-term risk compensation and compressing the term premium. In addition, we find evidence that this relationship is stronger under inflation-targeting regimes and larger in sub-Saharan Africa, but does not hold during systemic global crises. Finally, using dominance analysis, we show that domestic fundamentals explain more of the variation in yields than global factors. These findings demonstrate that debt markets directly price institutional credibility, offering clear guidance for the design of monetary frameworks.

IMF Working PaperVol. 2026(058)
Partnerships for the goals
Openalex Percentile: Top 6%
Global Financial Crisis and Policies
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The Credibility Premium — Albert Touna Mama, Adrian Alter, et al. · IMF Working Paper (2026) | TGRS Research Map | TGRS