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The Value of Institutions for Financial Markets

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  • Thomas Stratmann
  • Bernardin Akitoby

Abstract

This paper investigates the value of political institutions for financial markets, using panel data from emerging market countries. We test the hypothesis that changes in political institutions, such as improvements in democratic rights and increased government accountability, have a direct effect on sovereign interest rate spreads. We find that financial markets value institutions over and above the economic and fiscal outcomes these institutions shape. Democracy and accountability generally lower sovereign spreads, political risk tends to increase them, and financial markets tend to view election years negatively.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/27.

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Length: 23
Date of creation: 01 Feb 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/27

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Related research

Keywords: Emerging markets; Financial sector; Governance; Economic models; fiscal variables; political institutions; fiscal policy; political rights; democratic accountability; fiscal policy variables; fiscal outcomes; government revenue; political constraints; government accountability; discretionary fiscal policy; fiscal adjustments; fiscal adjustment; fiscal consolidations; foreign borrowing; political system; fiscal affairs department; fiscal affairs; government spending; government size; political instability; public expenditure; government institutions; fiscal response; fiscal deficits; democratic regimes; executive branch; government policies; fiscal variable; spending cuts; democratic rights; fiscal consolidation; political variables; budgetary consolidation;

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  6. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  7. Acemoglu, Daron & Johnson, Simon & Robinson, James A., 2005. "Institutions as a Fundamental Cause of Long-Run Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 6, pages 385-472 Elsevier.
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  15. Block, Steven A. & Vaaler, Paul M., 2004. "The price of democracy: sovereign risk ratings, bond spreads and political business cycles in developing countries," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 917-946, October.
  16. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  17. Sebastian Edwards, 1983. "LDC's Foreign Borrowing and Default Risk: An Empirical Investigation," NBER Working Papers 1172, National Bureau of Economic Research, Inc.
  18. Ari Aisen & Francisco José Veiga, 2005. "Does Political Instability Lead to Higher Inflation? A+L2990 Panel Data Analysis," IMF Working Papers 05/49, International Monetary Fund.
  19. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
  20. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 803-832, December.
  21. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
  22. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
  23. Carlos Mulas-Granados, 2003. "The Political and Economic Determinants of Budgetary Consolidation in Europe," European Political Economy Review, European Political Economy Infrastructure Consortium, vol. 1(Spring), pages 15-39.
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