Sovereign Spreads and the Political Leaning of Nations

Nations with a higher propensity to elect left governments tend to pay higher and more volatile sovereign spreads. We build a sovereign default model with elections between left and right policymakers. Reelection probabilities increase with government spending, with the left having a small advantage (consistent with the data). We use variation in “election efficiency” to create model economies that elect the left more (left-leaning) or less frequently (right-leaning) in equilibrium. The left-leaning economy has a higher reluctance for fiscal austerity than the right-leaning economy, chooses higher government spending, and faces higher spreads, resulting in lower welfare.

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