Market Disciplining of the Developing Countries' Sovereign Governments
This paper contributes to the current literature on market disciplining of the sovereign governments in two ways: Firstly, it distinguishes both sides of the market discipline hypothesis (MDH) by adopting 3SLS to incorporate the contemporaneous feedback effects between primary structural budget balances and country default risk premium. Secondly, by utilizing the IMF's disaggregated government finance statistics data, structural primary budget balances are estimated to test the MDH for developing countries. The results show a disciplinary effect of the financial markets on the sovereign governments and the findings are robust to two alternative measurements of structural budget balances. After controlling for the exchange rate regime, the results confirm that sovereign governments are more disciplined in floating countries, while, in countries with fixed 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 fiscal indicators, 3SLS estimation results show well-functioning financial markets in the sample countries. Controlling for political ideology does not change the conclusion but financial markets seem to function more efficient in the fixed exchange rate regime seeking countries.
|Date of creation:||Feb 2009|
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