^*Rachel Glennerster is executive director of Abdul Latif Jameel Poverty Action Lab at the Massachusetts Institute of Technology, and Yongseok Shin is an assistant professor of economics at the University of Wisconsin-Madison. The authors would like to thank Abhijit Banerjee, Charis Christofides, Przemek Gajdeczka, Bryan Graham, Campbell Harvey, John Hicklin, Simon Johnson, Michael Kremer, Paolo Mauro, Ydahlia Metzgen, Christian Mulder, Ben Olken, Ron Smith, Antonio Spilimbergo, Andrew Tiffin, and seminar participants at the IMF and Harvard Kennedy School for useful comments. We also benefited from an anonymous referee's very constructive suggestions. Kyu-Chul Jung and Erkut Kucukboyaci provided excellent research assistance.

Abstract

This paper studies whether transparency (measured by accuracy and frequency of macroeconomic information released to the public) leads to lower borrowing costs in sovereign bond markets. We analyze the data generated during 1999–2002 when the International Monetary Fund (IMF) instituted new ways for countries to increase their transparency—by publishing the IMF's assessment of their policies and committing to release more accurate data more frequently. The IMF's preexisting internal timetable for country reports introduced exogenous variation when countries were faced with the option to become more transparent. We exploit this time variation and construct instruments to estimate the impact of transparency on bond yields in a way that is free from endogeneity bias. We find that countries experience a statistically significant decline in borrowing costs (11 percent reduction in credit spreads on average) when they choose to become more transparent. The magnitude of the decline is inversely related to the initial level of transparency and the size of the debt market.