The price of democracy: Sovereign risk ratings, bond spreads and political business cycles in developing countries

Steven A. Block, Paul M. Vaaler

Research output: Contribution to journalArticlepeer-review

91 Scopus citations

Abstract

This study examines the proposition that political business cycle theory is relevant to private foreign lenders to developing countries. We find that: credit rating agencies downgrade developing country ratings more often in election years, and do so by approximately one rating level; bond spreads are higher in the 60 days before an election compared to spreads in the 60 days after an election; spreads trend significantly downward in the 60 days before an election, but then flatten out in the 60 days after an election. Agencies and bondholders view elections negatively, increasing the cost of capital to developing democracies.

Original languageEnglish (US)
Pages (from-to)917-946
Number of pages30
JournalJournal of International Money and Finance
Volume23
Issue number6
DOIs
StatePublished - Oct 2004

Bibliographical note

Funding Information:
The authors gratefully acknowledge comments and suggestions from Laurent Jacque, Michael Klein, Gerry McNamara, Phil Uhlmann and Burkhard Schrage, who also provided excellent research assistance. This research was supported financially by the Fletcher School’s Academic Dean’s Office and the Fletcher School’s Hitachi Center for Technology and International Affairs.

Keywords

  • Bond spreads
  • Credit ratings
  • Developing countries
  • Elections
  • Political business cycles

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