Political institutions and sovereign borrowing: evidence from nineteenth-century Argentina

Abstract

I study the relationship between political institutions and sovereign borrowing when constitutional constraints are systematically chosen to obtain better credit conditions. I argue that the impact of institutional constraints on country risk premia depends on the gov- ernment's concern with the country's creditworthiness and its "willingness to repay"; two variables that are hardly observable. To properly evaluate the relationship between political institutions and sovereign borrowing, I focus on the link between institutional constraints and the risk premia of Argentine bonds between 1822 and 1913. Specifically, I analyze whether a "structural break" in the government's cost of borrowing time-series exists. I use the Perron-Volesang test for structural change with unknown break dates. The statistical analysis indicates that the adoption of institutional constraints led to significant improve- ments in borrowing terms: the series has a single structural change; and the distinctive break point is associated with the country's adoption of constitutional checks and balances. Time- series regressions and instrumental variables (IV) estimation reinforce these findings.