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Democratization and Globalization in Emerging Market Countries: An Econometric Study

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*Earlier versions of this paper were presented at the Annual Meeting of the American Political Science Association, San Francisco, August 30-September 2, 2001 and at the 2001 International Studies Association Meeting in Chicago, Illinois. For comments and criticisms we thank William Bernhard, David Leblang, Brian Roberts, David Stasavage, and Tom Willett. For the data used in gauging the impact of extragovernmental political behavior on financial markets we thank Doug and Joe Bond.

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... 1 Following on from this, the political cycle is also crucial to capital markets, which have in the past been acutely sensitive to political developments in Latin American democracies, be they cabinet reshuffles or elections. Bankers and financial markets react to elections (Jensen and Schmith, 2005; Whitehead, 2006; Chang, 2007; Nieto-Parra and Santiso, 2008), re-allocate money after democratic transitions (Rodríguez and Santiso, 2008) or react to political announcements and events (Santiso, 2003; Hays, Freeman and Nesseth, 2003; Frieden, Leblang and Valev, 2008). While this phenomenon is not specific to emerging economies, it remains especially strong there (Campello, 2007). ...
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In this paper we test the impact of elections on fiscal policy in Latin American economies in comparison to OECD countries over the period 1990-2006. We find that in Latin American countries, the average primary balance declines by an amount close to 0.7 per cent of GDP during an election year, confirming the hypothesis of fiscal deteriorations during the election cycle. Most of this movement is due to the expenditure component and within this it is current (close to 0.8 per cent of GDP) rather than capital expenditure that is most affected. By contrast, in OECD countries, the observed changes in the primary balance and current expenditures during election years are minimal. Our analysis also suggests that re-elections of incumbent candidates in Latin America have a considerable impact on the expenditure side of the fiscal balance. Finally, by comparing the 2005-2006 electoral cycle with respect to prior electoral cycles, we note a slight improvement of fiscal management around elections in the region. We derive policy implications and recommendations from our findings. L’objectif de cet article est de tester l’impact des élections sur la politique budgétaire dans les pays d’Amérique Latine par rapport aux pays de l’OCDE pendant la période 1990-2006. Nos résultats montrent qu’en moyenne le solde primaire diminue de près de 0,7 pourcent du PIB pendant l’année électorale, ce qui confirme l’hypothèse d’une détérioration de la discipline budgétaire pendant le cycle électoral en Amérique Latine. Une grande partie de ce mouvement s’explique par une croissance des dépenses publiques qui trouve son origine dans les dépenses courantes (près de 0,8 pourcent du PIB) plus que dans les dépenses en capital. En revanche, dans les pays de l’OCDE, le solde primaire et les dépenses courantes évoluent peu pendant l’année électorale. Notre analyse suggère également que les réélections des candidats en exercice en Amérique Latine ont u
... Empirical evidence analysing the impact of politics on capital markets is abundant. Although the impact of electoral cycles for investors and financial intermediaries is strongly felt, the reaction of global financial markets to politics in emerging democracies may differ significantly within a single region, being dependent on the degree of democratisation and the transparency of the policy‐making process, the historical existence of democratic institutions, the scale of the government's legislative majority and its political cohesion (Hays et al, 2003;MacIntyre, 2001). Eichengreen, Rose and Wyploz (1995) were among the first to address the political dimension of financial crises, finding close links between political processes and exchange‐rate turbulence. ...
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This paper focuses on the interactions between the political cycle and capital markets in emerging economies, examining the way in which Wall Street strategists react to major Latin American political events, specifically presidential elections. For this purpose we construct a database of all sovereign bond recommendations of the major investment banks active in emerging bond markets from 1997 to 2008. Assessing the impact of presidential elections on investment banks' recommendations, we conclude firstly, that the political cycle is a major determinant variable in explaining the downgrading of sovereign bonds in the three months prior to presidential elections. Secondly, the credibility of future macro (fiscal and monetary) policies announced by presidential candidates during campaigns stands out as an important determinant of investment banks' recommendations. In particular, if candidates are not committed to defend sustainable macroeconomic policies, investment banks' downgrade sovereign debt prior to elections.
... The response of financial markets to electoral and partisan change, examined in a study of 78 developing countries using monthly data from 1975 to 1998, confirms that speculative attacks are more likely just after an election as compared to all other periods (Leblang, 2002). The reaction of global financial markets to politics in new democracies within the same region may also differ, depending on the degree of democratization and the transparency (or perceived transparency) of the policy-making process, the length of time democratic institutions have been in existence, and the scale of the government's legislative majority and its political cohesion (Hays et al., 2001; MacIntyre, 2001: 81–122). Thus politics is far from neutral in financial markets. ...
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Bernhard, W. and D. Leblang (forthcoming) Political Processes and the Foreign Exchange Market American Journal of Political Science. Blomberg, S. B. and G. D. Hess (1997) Politics and Exchange Rate Forecasts Journal of International Economics 43:189-205.
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Fitting the Moments: A Comparison Of ARCH and Regime Switching Models for Daily Stock Returns
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(l993) Regime Switching with Time Varying Transition Probabilities: Methodological Issues and Applications to Exchange Rates
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Weinbach, G. C. (l993) Regime Switching with Time Varying Transition Probabilities: Methodological Issues and Applications to Exchange Rates. Ph.D. Dissertation, University of Pennsylvania.