The Political Determinants of Government Bond Holdings

46 Pages Posted: 19 Mar 2016 Last revised: 25 May 2019

See all articles by Stefan Eichler

Stefan Eichler

Leibniz Universität Hannover; Halle Institute for Economic Research

Timo Plaga

Dresden University of Technology - Faculty of Economics and Business Management

Date Written: March 1, 2016

Abstract

This paper analyzes the link between political factors and sovereign bond holdings of US investors in 60 countries over the 2003-2013 period. We find that, in general, US investors hold more bonds in countries with few political constraints on the government. Moreover, US investors respond to increased uncertainty around major elections by reducing government bond holdings. These effects are particularly significant in democratic regimes and countries with sound institutions, which enable effective implementation of fiscal consolidation measures or economic reforms. In countries characterized by high current default risk or a sovereign default history, US investors show a tendency towards favoring higher political constraints as this makes sovereign default more difficult for the government. Political instability, characterized by the fluctuation in political veto players, reduces US investment in government bonds. This effect is more pronounced in countries with low sovereign solvency.

Keywords: Government bond portfolio, Political factors, Treasury International Capital data, PPML

JEL Classification: G11, G15, G18, H63, H11

Suggested Citation

Eichler, Stefan and Plaga, Timo, The Political Determinants of Government Bond Holdings (March 1, 2016). Journal of International Money and Finance, Vol. 73, Part A, May 2017, Available at SSRN: https://ssrn.com/abstract=2746369 or http://dx.doi.org/10.2139/ssrn.2746369

Stefan Eichler

Leibniz Universität Hannover

Institute of Money and International Finance
Koenigsworther Platz 1
Hannover, 30167
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Timo Plaga (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

HOME PAGE: http://https://tu-dresden.de/bu/wirtschaft/ime/die-professur/beschaeftigte/timo-plaga

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
44
Abstract Views
768
PlumX Metrics