Political Institutions, Credible Commitment, and Sovereign Debt in Advanced Economies

This article tests systematically the effect of political structures on the credibility of sovereign debtors in advanced economies. It argues that power-sharing and party system polarization have important effects on long-term interest rates. Where collective responsibility is high and polarization is low, the market perceives a more credible commitment on the part of sovereign debtors. These arguments derived from the theory of credible commitments perform much better than alternative accounts of the politics of sovereign debt, namely a market preference for right-wing governments and more flexible polities. The principal data consist of a panel of 23 rich countries between 1970 and 2009. There are tests for robustness to a wider sample and a variety of different measurements.