Democracy's Spread: Elections and Sovereign Debt in Developing Countries
39 Pages Posted: 10 Jul 2003
Date Written: June 2003
We use partisan and opportunistic political business cycle ("PBC") considerations to develop and test a framework for explaining election-period changes in credit spreads for developing country sovereign bonds. Pre-election bond spread trends are significantly linked both to the partisan orientation of incumbents facing election and to expectations of incumbent victory. Bond spreads for right-wing (leftwing) incumbents increase (decrease) as the likelihood of left-wing (right-wing) challenger victory increases. For right-wing incumbent partisan and opportunistic PBC effects bondholder risk perceptions are mutually reinforcing. For left-wing incumbents partisan PBC effects dominate bondholder risk perceptions compared to opportunistic PBC effects.
Keywords: economics, elections, developing countries, sovereign bonds, spreads
JEL Classification: D72, F30, F34, G12, G14, G15, G29
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