Political Institutions and Sovereign Borrowing: Evidence from Nineteenth-Century Argentina
35 Pages Posted: 17 Jul 2009 Last revised: 13 Nov 2009
Date Written: November 12, 2009
Abstract
I analyze the relationship between political institutions and sovereign borrowing in a simple model where institutions are endogenous and governments vary in their credit risk and political goals. The model formalizes the main intuition in North and Weingast (1989) and also reconciles seemingly contradictory claims in the existing literature. My main result suggests that one has to consider both the direction and the magnitude of the institutional effects on a country's credit risk to establish that greater institutional constraints lead to better borrowing terms. I evaluate the model’s central implications using data on the risk premia of Argentine bonds between 1822 and 1913. My analysis reveals that one cannot reject the existence of a unit root in the series' autoregressive representation. In particular, the existence of a single and distinct break point in 1859 indicates that the adoption of constitutional constraints had a permanent effect on the country's borrowing costs.
Keywords: Sovereign Debt, Political Institutions, Risk Premia, Argentina
JEL Classification: O43, H11, N46, N16, O54
Suggested Citation: Suggested Citation
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