The Political Economy of Sovereign Debt: Global Finance and Electoral Cycles

Institute for International Economic Policy Working Paper Series

37 Pages Posted: 2 Apr 2014 Last revised: 13 Oct 2016

See all articles by Stephen B. Kaplan

Stephen B. Kaplan

George Washington University - Department of Political Science; George Washington University - Institute for International Economic Policy (GWIIEP)

Kaj Thomsson

Maastricht University - Department of Economics

Date Written: June 21, 2016

Abstract

Political economy theory expects politicians to use budget deficits to engineer an election-timed boom, known as the political business cycle. We challenge and contextualize this view by incorporating the financial constraints faced by governments into an electoral framework. We argue that the extent of ownership dispersion among creditors has important effects for governments’ policy autonomy. Specifically, we contend that when highly indebted governments become more reliant on international bond markets – as opposed to traditional bank lending – politicians alter the way they respond to domestic constituents. In an econometric test of 16 Latin American countries from 1961 to 2011, we show that financial decentralization breeds austerity. More specifically, we find that politicians exhibit more fiscal discipline when they fund a greater share of their spending through decentralized bond markets. Furthermore, we find this disciplining effect to be particularly strong during election periods.

Keywords: Political Economy, Austerity, Collective Action, Latin America, Global Economy, Developing Economies, Debt, Financial Crises, Bond Markets, Fiscal Policy, Macroeconomic Policy

JEL Classification: E44, E62, F63, F65, F68, G01, G10, H30, H60, N16, N26, O54, O57

Suggested Citation

Kaplan, Stephen B. and Thomsson, Kaj, The Political Economy of Sovereign Debt: Global Finance and Electoral Cycles (June 21, 2016). Institute for International Economic Policy Working Paper Series. Available at SSRN: https://ssrn.com/abstract=2418574 or http://dx.doi.org/10.2139/ssrn.2418574

Stephen B. Kaplan (Contact Author)

George Washington University - Department of Political Science ( email )

Department of Political Science
Monroe Hall 470, 2115 G Street, N.W.
Washington, DC 20052
United States
202-994-6680 (Phone)

George Washington University - Institute for International Economic Policy (GWIIEP) ( email )

1957 E Street, N.W.
Suite 502
Washington, DC 20052
United States

Kaj Thomsson

Maastricht University - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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