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

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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