This paper contributes to the current literature on market disciplining of the sovereign gov- ernments in two ways: Firstly, it distinguishes the both sides of the market discipline hypothesis (MDH) by adopting 3SLS to incorporate the contemporaneous feedback e®ects between primary structural budget balances and country default risk premium. Secondly, by utilizing the IMF's disaggregated government ¯nance statistics data, structural primary budget balances are esti- mated to test the MDH for developing countries. The results show a disciplinary e®ect of the ¯nancial markets on the sovereign governments and the ¯ndings are robust to two alternative measurements of structural budget balances. After controlling for the exchange rate regime, the results con¯rm that sovereign governments are more disciplined in °oating countries, while, in countries with ¯xed exchange rate regime, sovereigns seem to be irresponsive to the change in the default risk premium posed by the market. As for the market's response to change in ¯scal indicators, 3SLS estimation results show well-functioning ¯nancial markets in the sample countries. Controlling for political ideology does not change the conclusion but ¯nancial markets seem to function more e±cient in the ¯xed exchange rate regime seeking countries.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number
0902.