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Sovereign debt: election concerns and the democratic disadvantage

Research output: Contribution to journalArticle

Amrita Dhillon, Andrew Pickering, Tomas Sjöström

Original languageEnglish
Pages (from-to)320-343
Number of pages24
JournalOxford Economic Papers
Volume71
Issue number2
Early online date31 Aug 2018
DOIs
Publication statusPublished - Apr 2019

King's Authors

Abstract

We re-examine the concept of 'democratic advantage' in sovereign debt ratings when optimal repayment policies are time-inconsistent. If democratically elected politicians are unable to make credible commitments, then default rates are inefficiently high, so democracy potentially confers a credit market disadvantage. Institutions that are shielded from political pressure may ameliorate the disadvantage by adopting a more farsighted perspective. Using a numerical measure of institutional farsightedness obtained from the Global Insight Business Risk and Conditions database, we find that the observed relationship between credit ratings and democratic status is strongly conditional on farsightedness. With myopic institutions, democracy is associated with worsened credit ratings on average by about three investment grades. With farsighted institutions there is, if anything, a democratic advantage.

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