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Elections and sovereign debt in advanced economies
McMenamin, Iain; Breen, Michael; Portillo, Juan Munoz
This article argues that advanced economies never eradicated political risk. We demonstrate that elections had large impacts on the long-term interest rates of nineteen countries in 130 elections over thirty years. Using an event-study methodology, we calculate that the resolution of uncertainty on the announcement of election results reduces interest rates. Very little of the variation is explained by economic variables. By contrast, familiar variables from comparative politics provide powerful explanations of variation in the impact of elections on borrowing rates. The biggest is ideology: the larger the swing towards the right in the parliament the larger the reduction in the interest rate. Two other variables also matter through their role in uncertainty. Close elections increase uncertainty during the campaign, leading to a greater reduction in uncertainty when the result is announced and a drop in the interest rate. By contrast, consensual institutions reduce uncertainty during campaigns and therefore do not reduce the interest rate. Political economists should not ask whether there is political risk or not. Rather they need to calculate how much risk there is and explain variation.
Keyword(s): Political science; Elections; Economics; Political economics; Interest rates
Publication Date:
2013
Type: Working paper
Peer-Reviewed: Unknown
Language(s): English
Institution: Dublin City University
Citation(s): McMenamin, Iain ORCID: 0000-0002-1704-390X <https://orcid.org/0000-0002-1704-390X>, Breen, Michael ORCID: 0000-0002-5857-9938 <https://orcid.org/0000-0002-5857-9938> and Portillo, Juan Munoz (2013) Elections and sovereign debt in advanced economies. Working Papers in International Studies. (Paper No. 3013/1). Dublin City University.
Publisher(s): Dublin City University
File Format(s): application/pdf
Related Link(s): http://doras.dcu.ie/18358/1/1301.pdf
First Indexed: 2013-06-11 05:10:09 Last Updated: 2019-02-09 06:35:05