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The Political Determinants of Government Bond Holdings

Stefan Eichler and Timo Plaga

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: This paper analyzes the link between political factors and sovereign bond holdings of US investors in 60 countries over the 2003-2013 period. We find that, in general, US investors hold more bonds in countries with few political constraints on the government. Moreover, US investors respond to increased uncertainty around major elections by reducing government bond holdings. These effects are particularly significant in democratic regimes and countries with sound institutions, which enable effective implementation of fiscal consolidation measures or economic reforms. In countries characterized by high current default risk or a sovereign default history, US investors show a tendency towards favoring higher political constraints as this makes sovereign default more difficult for the government. Political instability, characterized by the fluctuation in political veto players, reduces US investment in government bonds. This effect is more pronounced in countries with low sovereign solvency.

Keywords: Government bond portfolio; Political factors; Treasury International Capital data; PPML (search for similar items in EconPapers)
JEL-codes: G11 G15 G18 H11 H63 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2016-03
New Economics Papers: this item is included in nep-fmk and nep-pol
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http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-573.pdf (application/pdf)

Related works:
Journal Article: The political determinants of government bond holdings (2017) Downloads
Working Paper: The Political Determinants of Government Bond Holdings (2016) Downloads
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