The role of central bank independence and transparency in mitigating asymmetric information in sovereign debt markets

Using a comprehensive dataset of sovereign bond issuances and various measures of CBI and transparency from 1973 to 2018, we investigate the impact of central bank independence and transparency on sovereign borrowing costs. We find that higher levels of CBI and transparency are associated with lower sovereign bond coupon rates, highlighting their role as signals of institutional credibility. We also examine the interaction between CBI, transparency, and participation in International Monetary Fund (IMF) programs, documenting that being part of an IMF program further reduces borrowing costs, particularly in countries with stronger institutional frameworks. Our findings suggest that transparency and CBI act as substitutes in reducing sovereign risk premiums, with transparency playing a larger role in environments where central bank independence is weaker.