Delegating discipline: how indexes restructured the political economy of sovereign bond markets

Cormier, Benjamin and Naqvi, Natalya ORCID: 0000-0003-0821-070X (2023) Delegating discipline: how indexes restructured the political economy of sovereign bond markets. Journal of Politics, 85 (4). 1501 - 1515. ISSN 0022-3816

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Abstract

Outside of the rich world, international financial markets are thought to discipline borrowing governments by monitoring political and economic characteristics. But increasingly, asset managers do not assess individual country risk/return profiles. They replicate benchmark indexes, delegating investment decisions to index providers. This has two effects. First, it relocates market discipline into the hands of index providers. Second, it alters the constraints sovereigns face when accessing bond markets, conditioning the relationship between a sovereign’s political-economic features and its ability to raise capital. Using a novel data set of index inclusion and weights, we show that country-specific factors traditionally associated with bond market access do not have the expected constraining effects on countries included in a major index but do continue to affect excluded countries. Index investment has profoundly restructured debt markets by circumscribing the disciplinary link between country characteristics and capital allocation, with wide-ranging implications for the political economy of debt and finance.

Item Type:	Article
Official URL:	https://www.journals.uchicago.edu/toc/jop/current
Additional Information:	© 2022 Southern Political Science Association
Divisions:	International Relations
Subjects:	J Political Science > JF Political institutions (General) H Social Sciences > HG Finance
JEL classification:	H - Public Economics > H6 - National Budget, Deficit, and Debt > H62 - Deficit; Surplus
Date Deposited:	03 Nov 2022 10:45
Last Modified:	18 Nov 2024 08:21
URI:	http://eprints.lse.ac.uk/id/eprint/117248

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