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 journalArticle

86 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 1 2004

Keywords

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

Fingerprint Dive into the research topics of 'The price of democracy: Sovereign risk ratings, bond spreads and political business cycles in developing countries'. Together they form a unique fingerprint.

  • Cite this