Debt, Defaults and Dogma: Politics and the Dynamics of Sovereign Debt Markets

42 Pages Posted: 9 Sep 2018

See all articles by Jonny Cotoc

Jonny Cotoc

McMaster University

Alok Johri

McMaster University - Department of Economics

César Sosa-Padilla

McMaster University - Faculty of Social Sciences

Date Written: August 25, 2018

Abstract

Using data from 40 nations, we obtain new stylized facts regarding the impact of political leanings of the ruling government on sovereign debt yields and fiscal policy. Left-wing governments' yields are 166 basis points higher and 23% more volatile than yields of right-wing governments. Moreover, left-wing governments face more counter-cyclical yields. Left-wing governments have higher levels of government spending and right-wing governments collect lower tax revenue as a percent of GDP. A calibrated sovereign default model with elections and two politically heterogeneous policy makers who differ in the marginal impact of their fiscal choices on their re-election probabilities delivers the above-mentioned facts.

Keywords: Sovereign Default, Interest Rate Spread, Political Turnover, Left-Wing, Right-Wing, Cyclicality of Fiscal Policy

JEL Classification: F34, F41, E62

Suggested Citation

Cotoc, Jonny and Johri, Alok and Sosa-Padilla, César, Debt, Defaults and Dogma: Politics and the Dynamics of Sovereign Debt Markets (August 25, 2018). Available at SSRN: https://ssrn.com/abstract=3240166 or http://dx.doi.org/10.2139/ssrn.3240166

Jonny Cotoc (Contact Author)

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Alok Johri

McMaster University - Department of Economics ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

César Sosa-Padilla

McMaster University - Faculty of Social Sciences ( email )

Canada

HOME PAGE: http://sites.google.com/site/cesarsosapadilla/

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