The Democratic Advantage: Institutional Foundations of Financial Power in International Competition

Despite their presumed liabilities, institutions associated with democracy serve as a source of power in prolonged international competition by increasing the financial resources that states can bring to bear. The theory of sovereign debt suggests that a state's ability to raise money through public borrowing is enhanced when debtholders have mechanisms for sanctioning state leaders in the event of default. Institutions associated with liberal government provide such mechanisms. All other things being equal, states that possess these institutions enjoy superior access to credit and lower interest rates than do states in which the sovereign has more discretion to default unilaterally. Liberal states can not only raise more money from a given economic base but can also pursue tax-smoothing policies that minimize economic distortions. The ability to finance competition in a manner that is consistent with long-term economic growth generates a significant advantage in prolonged rivalries. These claims are explored by analyzing the Anglo-French rivalry (1688–1815) and the Cold War.

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The Evolution and Importance of Public Credit

States of Credit ◽

10.23943/princeton/9780691140575.003.0002 ◽

2011 ◽

Author(s):

David Stasavage

Keyword(s):

Interest Rates ◽

Early Modern Europe ◽

Access To Credit ◽

Public Credit ◽

The Difference ◽

City States ◽

The Cost ◽

Territorial States ◽

New Evidence

This chapter examines why access to credit was important for European states and provides extensive new evidence on the evolution of public credit across five centuries, from 1250 to 1750. The ability to borrow was critical in medieval and early modern Europe because it allowed states to participate in wars, either defensive or offensive. In order to better understand this fact, the chapter analyzes the movement that took place from compulsory to paid service for soldiers, along with opportunities to finance wars through current taxation. It also explains when states first borrowed long-term and measures the cost of borrowing, focusing on interest rates based on nominal rates at issue when these are available, and based on the fiscal proxy when they are not. The chapter highlights the difference between city-states and territorial states, with the former enjoying an apparent financial advantage that allowed them to begin borrowing earlier and to obtain access to lower-cost finance.

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Kenneth A. Schultz and Barry R. Weingast (2003), 'The Democratic Advantage: Institutional Foundations of Financial Power in International Competition', International Organization, 57, pp. 3-42.

International Security and Conflict ◽

10.4324/9781315251943-16 ◽

2017 ◽

pp. 179-218

Keyword(s):

International Organization ◽

International Competition ◽

Financial Power ◽

Democratic Advantage ◽

Institutional Foundations

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Sovereign Debt and Regime Type: Reconsidering the Democratic Advantage

International Organization ◽

10.1017/s0020818312000288 ◽

2012 ◽

Vol 66 (4) ◽

pp. 709-738 ◽

Cited By ~ 79

Author(s):

Emily Beaulieu ◽

Gary W. Cox ◽

Sebastian Saiegh

Keyword(s):

Political Institutions ◽

Sovereign Debt ◽

Credit Rating ◽

Regime Type ◽

Gdp Per Capita ◽

Data Sets ◽

Credit Access ◽

Access To Credit ◽

Per Capita ◽

Democratic Advantage

AbstractThe literature exploiting historical data generally supports the democratic advantage thesis, which holds that democracies can sell more bonds on better terms than their authoritarian counterparts. However, studies of more recent—and extensive—data sets find that democracies have received no more favorable bond ratings from credit rating agencies than otherwise similar autocracies; and have been no less prone to default. These findings raise the question: where is the democratic advantage? Our answer is that previous assessments of the democratic advantage have typically (1) ignored the democratic advantage in credit access; (2) failed to account for selection effects; and (3) treated GDP per capita as an exogenous variable, ignoring the many arguments that suggest economic development is endogenous to political institutions. We develop an estimator of how regime type affects credit access and credit ratings analogous to the “reservation wage” model of labor supply and treat GDP per capita as an endogenous variable. Our findings indicate that the democratic advantage in the postwar era has two components: first, better access to credit (most autocracies cannot even enter the international bond markets); and second, better ratings, once propensity to enter the market is controlled and GDP per capita is endogenized.

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Economic Turmoil in Islamic Banking Investment

ETIKONOMI ◽

10.15408/etk.v19i2.17206 ◽

2020 ◽

Vol 19 (2) ◽

Author(s):

Budiandru Budiandru ◽

Sari Yuniarti

Keyword(s):

Interest Rates ◽

Stock Price ◽

Time Series Data ◽

Series Data ◽

Islamic Banking ◽

Vector Error Correction ◽

Investment Financing ◽

Vector Error ◽

Operational Activities

Investment financing is one of the operational activities of Islamic banking to encourage the real sector. This study aims to analyze the effect of economic turmoil on investment financing, analyze the response to investment financing, and analyze each variable's contribution in explaining the diversity of investment financing. This study uses monthly time series data from 2009 to 2020 using the Vector Error Correction Model (VECM) analysis. The results show that the exchange rate, inflation, and interest rates significantly affect Islamic banking investment financing in the long term. The response to investment financing is the fastest to achieve stability when it responds to shocks to the composite stock price index. Inflation is the most significant contribution in explaining diversity in investment financing. Islamic banking should increase the proportion of funding for investment. Customers can have a larger business scale to encourage economic growth, with investment financing increasing.JEL Classification: E22, G11, G24How to Cite:Budiandru., & Yuniarti, S. (2020). Economic Turmoil in Islamic Banking Investment. Etikonomi: Jurnal Ekonomi, 19(2), xx – xx. https://doi.org/10.15408/etk.v19i2.17206.

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Interpreting the Reagan Deficits

10.23943/princeton/9780691158709.003.0006 ◽

2017 ◽

Author(s):

Thomas J. Sargent

Keyword(s):

Monetary Policy ◽

Interest Rates ◽

Reagan Administration ◽

Federal Budget ◽

Ronald Reagan ◽

Government Budget ◽

Government Deficits ◽

Tax Smoothing ◽

The Government ◽

Monetary And Fiscal Policy

This chapter examines the large net-of-interest deficits in the U.S. federal budget that have marked the administration of Ronald Reagan. It explains the fiscal and monetary actions observed during the Reagan administration as reflecting the optimal decisions of government policymakers. The discussion is based on an equation whose validity is granted by all competing theories of macroeconomics: the intertemporal government budget constraint. The chapter first considers the government budget balance and the optimal tax smoothing model of Robert Barro before analyzing monetary and fiscal policy during the Reagan years: a string of large annual net-of-interest government deficits accompanied by a monetary policy stance that has been tight, especially before February 1985, and even more so before August 1982. Indicators of tight monetary policy are high real interest rates on government debt and pretax yields that exceed the rate of economic growth.

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