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Why do some countries default more often than others ? the role of institutions

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  • Qian, Rong

Abstract

This paper examines how a country's weak institutions and polarized government can affect the likelihood of its default on sovereign debt. Using a data set of 90 countries, it shows that strong institutions are associated with fewer sovereign default crises. In addition, when institutions are weak, a more polarized government tends to default more often. To explain these findings, the author develops a model showing the dynamics between the quality of institutions, the level of government polarization and sovereign default risk. Countries default more often when they lack rules and strong institutions to curb the influence of powerful groups on government policies. That is because in a polarized government, each powerful group makes decisions without considering the impact on other groups. Simulations of the model show that more than half the cross-country variation in sovereign default frequencies can be explained by institutional quality and the degree of government polarization observed in the data.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5993.

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Date of creation: 01 Mar 2012
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Handle: RePEc:wbk:wbrwps:5993

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Keywords: Debt Markets; Bankruptcy and Resolution of Financial Distress; Economic Theory&Research; Access to Finance; Emerging Markets;

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References

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  1. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2008. "Heterogeneous borrowers in quantitative models of sovereign default," Working Paper, Federal Reserve Bank of Richmond 07-01, Federal Reserve Bank of Richmond.
  2. Rong Qian & Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "On Graduation from Default, Inflation and Banking Crises: Elusive or Illusion?," NBER Chapters, in: NBER Macroeconomics Annual 2010, Volume 25, pages 1-36 National Bureau of Economic Research, Inc.
  3. Carmen M. Reinhart, 2010. "This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises," NBER Working Papers 15815, National Bureau of Economic Research, Inc.
  4. Woo, Jaejoon, 2003. "Social polarization, industrialization, and fiscal instability: theory and evidence," Journal of Development Economics, Elsevier, Elsevier, vol. 72(1), pages 223-252, October.
  5. Acemoglu, Daron & Johnson, Simon & Robinson, James A & Thaicharoen, Yunyong, 2002. "Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3575, C.E.P.R. Discussion Papers.
  6. Marcela Eslava & Oskar Nupia, 2010. "Political Fragmentation and Government Spending: Bringing Ideological Polarization into the Picture," DOCUMENTOS CEDE, UNIVERSIDAD DE LOS ANDES-CEDE 006713, UNIVERSIDAD DE LOS ANDES-CEDE.
  7. Pablo Sanguinetti, 1994. "Intergovernmental transfers and public sector expenditures: a game-theoretic approach," Estudios de Economia, University of Chile, Department of Economics, University of Chile, Department of Economics, vol. 21(2 Year 19), pages 179-212, December.
  8. Ugo Panizza & Eduardo Levy Yeyati, 2006. "The Elusive Costs of Sovereign Defaults," IDB Publications 6713, Inter-American Development Bank.
  9. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  10. De Paoli, Bianca & Hoggarth, Glenn & Saporta, Victoria, 2009. "Output costs of sovereign crises: some empirical estimates," Bank of England working papers 362, Bank of England.
  11. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  12. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
  13. Aizenman, Joshua, 1993. "Soft Budget Constraints, Taxes, and the Incentive to Cooperate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 819-32, November.
  14. Reinhart, Carmen & Rogoff, Kenneth, 2005. "Serial Default and Its Remedies," MPRA Paper 7423, University Library of Munich, Germany.
  15. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
  16. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
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Citations

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Cited by:
  1. Rong Qian & Carmen M. Reinhart & Kenneth Rogoff, . "On Graduation from Default, Inflation and Banking Crises: Elusive or Illusion?," Working Paper 14879, Harvard University OpenScholar.
  2. Javed, Omer, 2013. "Determinants of Institutional Quality: A Case Study of IMF Programme Countries," MPRA Paper 51344, University Library of Munich, Germany.
  3. Ahmadov, Ingilab & Mammadov, Jeyhun & Aslanli, Kenan, 2013. "Assessment of Institutional Quality in Resource-Rich Caspian Basin Countries," MPRA Paper 47430, University Library of Munich, Germany.
  4. Reinhart, Carmen & Qian, Rong & Rogoff, Kenneth, 2010. "Do countries “graduate” from crises? Some historical perspective," MPRA Paper 24761, University Library of Munich, Germany.
  5. Jeyhun Mammadov & Assoc. Prof. Dr. Jeyhun Mammadov & Prof. Dr. Ingilab Ahmadov & PhD candidate, Kenan Aslanli, 2013. "Assessment of Institutional Quality in Resource Rich Caspian Basin Countries," International Conference on Energy, Regional Integration and Socio-economic Development 5994, EcoMod.
  6. Eden, Maya & Kraay, Aart & Qian, Rong, 2012. "Sovereign defaults and expropriations : empirical regularities," Policy Research Working Paper Series 6218, The World Bank.

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