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Sovereign Spreads and the Political Leaning of Nations

Author

Listed:
  • Johnny Cotoc

    (McMaster University)

  • Alok Johri

    (McMaster University)

  • César Sosa-Padilla

    (University of Notre Dame/NBER)

Abstract
Nations vary widely in how often they are governed by left-wing governments. Using data from 56 nations over 45 years, we find that the propensity of a nation to elect the left is positively correlated with both the average level and volatility of their sovereign spreads. To explain these facts, we build a quantitative sovereign default model in which two policymakers (left and right) alternate in power. Reelection probabilities are increasing in government spending, with the left having a small advantage (as found in the data). We use variation in the responsiveness of reelection probabilities to government spending in order to create economies that elect the left more or less frequently in equilibrium. We call these the left leaning and the right leaning economy. The left leaning economy faces worse borrowing terms due to higher default risk. Moreover, both policymakers have a greater reluctance for fiscal austerity and choose a higher share of government spending as compared to their counterparts in the right leaning economy. These features imply large welfare losses for households.

Suggested Citation

  • Johnny Cotoc & Alok Johri & César Sosa-Padilla, 2023. "Sovereign Spreads and the Political Leaning of Nations," Working Papers 290, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:290
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    File URL: https://rednie.eco.unc.edu.ar/files/DT/290.pdf
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    References listed on IDEAS

    as
    1. Juan Jose Cruces & Marcos Buscaglia & Joaquin Alonso, 2002. "The Term Structure of Country Risk and Valuation in Emerging Markets," Working Papers 46, Universidad de San Andres, Departamento de Economia, revised Apr 2002.
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    Citations

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    Cited by:

    1. Alamgir, Farzana & Cotoc, Johnny & Johri, Alok, 2023. "The bribe rate and long run differences in sovereign borrowing costs," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    2. Azzimonti, Marina & Mitra, Nirvana, 2023. "Political constraints and sovereign default," Journal of International Money and Finance, Elsevier, vol. 137(C).
    3. Scholl, Almuth, 2024. "The politics of redistribution and sovereign default," Journal of International Economics, Elsevier, vol. 148(C).
    4. Farzana Alamgir & Alok Johri, 2022. "International Sovereign Spread Differences and the Poverty of Nations," Department of Economics Working Papers 2022-06, McMaster University.

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    More about this item

    Keywords

    Sovereign default; Interest rate spread; Political turnover; Left-wing; Rightwing; Cyclicality of fiscal policy.;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    NEP fields

    This paper has been announced in the following NEP Reports:

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