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Credit rating agencies in emerging democracies : Guardians of fiscal discipline ?

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  • Hanusch, Marek
  • Vaaler, Paul M.
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    Abstract

    Credit rating agencies have drawn criticism for failing to anticipate and deter root causes of the 2008-2009 financial crisis in the United States. However, this paper presents evidence that credit rating agencies regularly anticipate and deter governments in emerging democracies from opportunistic borrowing and potential financial crises related to elections and the political budget cycle behavior they encourage. The paper considers a sample of 18 such countries holding 32 presidential elections from 1989 to 2004. The analysis shows that credit rating agencies induced greater fiscal discipline during election periods when governments had incentives to borrow opportunistically for short-term electoral gain. Countries with higher credit rating agency sovereign ratings borrowed less than lower-rated countries in election periods, but borrowed more in non-election periods. Credit rating agencies promoted fiscal discipline during increasingly frequent election periods in emerging democracies.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6379.

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    Date of creation: 01 Mar 2013
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    Handle: RePEc:wbk:wbrwps:6379

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    Keywords: Debt Markets; Parliamentary Government; Bankruptcy and Resolution of Financial Distress; Emerging Markets;

    This paper has been announced in the following NEP Reports:

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    1. Lawrence J. White, 2010. "Markets: The Credit Rating Agencies," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 211-26, Spring.
    2. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
    3. Shi, Min & Svensson, Jakob, 2006. "Political budget cycles: Do they differ across countries and why?," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1367-1389, September.
    4. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
    5. Adi Brender & Allan Drazen, 2004. "Political Budget Cycles in New versus Established Democracies," NBER Working Papers 10539, National Bureau of Economic Research, Inc.
    6. 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.
    7. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
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