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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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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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Citations

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Cited by:
  1. Kim, Heeho, 2011. "The risk adjusted uncovered equity parity," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1491-1505.
  2. Hartwell , Christopher A., 2014. "The impact of institutional volatility on financial volatility in transition economies: a GARCH family approach," BOFIT Discussion Papers 6/2014, Bank of Finland, Institute for Economies in Transition.
  3. Sottile, Pedro, 2013. "On the political determinants of sovereign risk: Evidence from a Markov-switching vector autoregressive model for Argentina," Emerging Markets Review, Elsevier, vol. 15(C), pages 160-185.

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