Democratic institutions and regulatory privileges for government debt

Timm Betz and Amy Pond

European Journal of Political Economy, 2023, vol. 79, issue C

Abstract: How do democratic institutions shape financial market regulation? Focusing on the government’s fiscal motives in financial market regulation, we present a new dataset documenting policies that governments use to place their own debt in an advantageous position on financial markets. These policies, which we call borrowing privileges, commonly require that banks and institutional investors hold their own government’s debt, and take a place in-between prudential and repressive regulation. Drawing on data for 58 non-OECD countries, we document that borrowing privileges are more likely to be implemented in countries with democratic institutions. Focusing on the mechanisms for this association, we show that several characteristics typically associated with democracies – increased revenue needs from trade liberalization, political competition and transparency, and the growth of financial markets – make these policies attractive to policy-makers. We contribute to the literature on the institutional sources of financial regulation and show how governments balance the growth of financial markets with revenue concerns.

Keywords: Sovereign debt; Financial regulation; Financial repression; Prudential regulation; Democracy; Banking; Institutional investors; Stock markets; Pension funds; Portfolio investment (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:79:y:2023:i:c:s0176268023000824

DOI: 10.1016/j.ejpoleco.2023.102438

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