Abstract
We propose that institutional differences in executive-legislative relations generate heterogeneity in the creditworthiness of democracies in the sovereign credit market. In particular, there is a credibility advantage for parliamentarism relative to presidentialism, because the former, with stronger parties, elongates policy-makers’ time horizons and lowers their discount rate, thereby enhancing their ability to signal the credibility of their commitment to debt repayment. Our Heckman selection analysis of democracies from 1990 to 2012 confirms the existence of parliamentary advantage in sovereign credibility, and it also reveals a semi-presidential advantage relative to presidentialism. Our study contributes to the recent stream of research that problematizes the democracy/autocracy dichotomy in the study of sovereign credibility.
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Notes
Reneging can take the form of not just outright default but also policy actions intended to undermine the value of the sovereign’s debt security like loan conversion plans and inflationary monetary and fiscal policies (DiGiuseppe and Shea 2015: 561).
Note that sovereigns do not have to be in power to be able to extract payoffs. They can still extract payoffs in their post-tenure if their allies or affiliated parties are in power (Wright 2008).
This idea is first hinted in North and Weingast’s seminal work (1989: 807) where they note that more short-sighted sovereigns can be expected to discount the reputation cost of defaults more heavily. Surprisingly, subsequent studies did not expand on this idea.
This is the case even for bills without a confidence motion explicitly attached (Huber 1996: 270).
One can argue that the ever-existing possibility of government dissolution and early election under parliamentarism can also limit policy makers’ time horizons by generating continuous electoral pressures. For the sake of simplicity, we would like to acknowledge this point here but not include it in our main theoretical argument. However, our empirical analysis will later help to reveal whether this opposition is strong enough to offset the elongating effect of parliamentary democracy on policy makers’ time preferences.
Shugart and Carey (1992) deviate from this common practice in that they distinguish two “non-pure” regime types: premier-presidential and president-parliamentary. For now, we follow the common practice and only include one hybrid type. However, we will later conduct an additional analysis with Shugart and Carey’s sub-types.
Aside from making our analysis more rigorous, these variables also help in identifying our causal mechanism. We assume that the democracy types influence sovereign credibility by signaling the sovereign’s time preference. However, institutions can influence the dependent variable with their general economic impacts as well (Gerring et al. 2009). Therefore, these controls help to increase our confidence that the impact captured by the regime type variables in our model’s estimation is due to our causal mechanism.
This variable is one-year lagged, because scholars find that counties with higher access to sovereign credit might be more willing to engage in aggressive behaviors due to their greater financing abilities (Shea 2014).
Furthermore, all of our empirical models include regional dummies as there might be some level of commonality within the specific regions of the world in terms of democratic experience and exposure to and relations with sovereign credit markets.
In their application of the Heckman model, Beaulieu et al. (2012) use decades-fixed effects and exports to the U.S. as instrument variables. We ended up not using decades-fixed effects and exports to the U.S., because decades do not seem be significantly correlated with the dependent variable of the selection model (the presence or absence in the credit market), and exports to the U.S. are significantly correlated with the dependent variables of both the first-stage and second-stage models.
It is a common practice in related literature to include the lagged value of the interest rate spread (Breen and McMenamin 2013; Beaulieu et al. 2012). The premise is that creditors remember a country’s creditworthiness in the past, implying that a country’s credit risk in the past matters to creditors’ assessments of the country’s credit risk today. Following a reviewer’s recommendation, though, when we exclude the lagged values, the results, available upon request, are even stronger.
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Camyar, I. Parliamentary and semi-presidential advantages in the sovereign credit market: democratic institutional design and sovereign credibility. Const Polit Econ 30, 383–406 (2019). https://doi.org/10.1007/s10602-019-09288-0
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DOI: https://doi.org/10.1007/s10602-019-09288-0