Resource Windfalls and Emerging Market Sovereign Bond Spreads: The Role of Political Institutions
12 Pages Posted: 4 Aug 2010
Date Written: July 2010
We examine the effect that revenue windfalls from international commodity price shocks have on sovereign bond spreads using panel data for 30 emerging market economies during the period 1997-2007. Our main finding is that positive commodity price shocks lead to a significant reduction in the sovereign bond spread in democracies, but to a significant increase in the spread in autocracies. To explain our finding we show that, consistent with the political economy literature on the resource curse, revenue windfalls from international commodity price shocks significantly increased real per capita GDP growth in democracies, while in autocracies GDP per capita growth decreased.
Keywords: Bonds, Commodity prices, External debt, External shocks, Gross domestic product, Political economy, Sovereign debt
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