Sovereign Debt: Election Concerns And The Democratic Disadvantage
Speaker(s) Amrita Dhillon, Andrew Pickering and Tomas Sjostrom Publication Reserve Bank of India, Main Bldg, 1st Floor, New Conference Room, Fort, Mumbai
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 meliorate 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 indeed strongly conditional on farsightedness. With myopic institutions, democracy is estimated to cost on average about 3 investment grades. With farsighted institutions there is, if anything, a democratic advantage.
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