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Debt, Defaults and Dogma: politics and the dynamics of sovereign debt markets

Johnny Cotoc, Alok Johri () and Cesar Sosa-Padilla ()

Department of Economics Working Papers from McMaster University

Abstract: Using data from 40 nations, we obtain new stylized facts regarding the impact of polit- ical 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 de- fault 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. (search for similar items in EconPapers)
JEL-codes: E62 F34 F41 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2018-08
New Economics Papers: this item is included in nep-mac, nep-opm and nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:mcm:deptwp:2018-13

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