The Value of Institutions for Financial Markets: Evidence from Emerging Markets
George Mason University - Buchanan Center Political Economy; CESifo (Center for Economic Studies and Ifo Institute); Harvard University - Edmond J. Safra Center for Ethics
International Monetary Fund (IMF) - Fiscal Affairs Department
IMF Working Paper No. 09/27
This paper investigates the value of political institutions for financial markets, using panel data from emerging market countries. We test the hypothesis that changes in political institutions, such as improvements in democratic rights and increased government accountability, have a direct effect on sovereign interest rate spreads. We find that financial markets value institutions over and above the economic and fiscal outcomes these institutions shape. Democracy and accountability generally lower sovereign spreads, political risk tends to increase them, and financial markets tend to view election years negatively.
Number of Pages in PDF File: 23
Keywords: Capital markets, Financial sector, Political economy, Governance, Social policy, Emerging markets, Cross country analysis, Economic modelsworking papers series
Date posted: March 11, 2009
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