Political institutions and sovereign borrowing: evidence from nineteenth-century Argentina

Sebastián Saiegh ()

Public Choice, 2013, vol. 156, issue 1, 75 pages

Abstract: I study the relationship between political institutions and sovereign borrowing when constitutional constraints are systematically chosen to obtain better credit conditions. I argue that the impact of institutional constraints on country risk premia depends on the government’s concern with the country’s creditworthiness and its “willingness to repay”; two variables that are hardly observable. To properly evaluate the relationship between political institutions and sovereign borrowing, I focus on the link between institutional constraints and the risk premia of Argentine bonds between 1822 and 1913. Specifically, I analyze whether a “structural break” in the government’s cost of borrowing time-series exists. I use the Perron-Volesang test for structural change with unknown break dates. The statistical analysis indicates that the adoption of institutional constraints led to significant improvements in borrowing terms: the series has a single structural change; and the distinctive break point is associated with the country’s adoption of constitutional checks and balances. Time-series regressions and instrumental variables (IV) estimation reinforce these findings. Copyright Springer Science+Business Media, LLC 2013

Keywords: Sovereign borrowing; Institutional constraints; Argentina; O43; H11; N46; N16; O54 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s11127-012-0003-4

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