Do sovereign bond markets react systematically to microeconomic policy reforms? Some observers suggest that investors are very attentive to supply-side policies such as those related to labor markets, corporate taxation, and product standards. They argue that, along with macroeconomic outcomes and broad financial market conditions, such reforms affect sovereign bond premiums, for developed as well as emerging economies. In contrast, we predict few systematic effects of supply-side policy reforms on sovereign bond market outcomes. Our theory draws on a standard three-equation model of the economy, widely accepted among economic and finance professionals. That model makes few clear predictions regarding the anticipated effects of microeconomic policy changes; as a result, we expect that such reforms will not generate systematic market reactions. Our analyses, based on daily data from 37 countries from 2004 to 2012, indeed reveal little evidence of a systematic bond market reaction to the 47 most significant reforms to corporate taxation and labor market regulation.These results call into question the notion that "bond market vigilantes" play a central role in compelling governments to enact specific microeconomic policy changes. K E Y W O R D S corporate tax policy, credit default swaps, event study, finance, labor policy, sovereign debt < International political economy 198 | MOSLEY Et aL. | 199MOSLEY Et aL. do not rely on daily trading data or offer a theoretical logic to explain why this should be the case. Indeed, Mosley (2003) assumed that investors hold clear preferences over government policies-macroeconomic as well as microeconomic-but that investors sometimes ignore a subset of those policies, as part of their attempts to economize on the collection and evaluation of information. Here, by contrast, we provide an account in which investors may be attentive to microeconomic policies as well, but in which they do not agree about how these policies matter for macroeconomic outcomes. We empirically test the central implication of this account, and the standard economic model underlying it: That microeconomic policy changes, even substantively large ones, have little systematic effect on investors' aggregate evaluations of default risk even when measured with daily price data.
What explains the emergence and persistence of institutions aimed at preventing any ruling group from using the state apparatus to advance particularistic interests? To answer this recurring question, a burgeoning literature examines the establishment of power-sharing institutions in societies divided by ethnic or religious cleavages. Going beyond existing scholarly work focused on these specific settings, we argue that political power-sharing institutions can also be the result of common disputes within the economic elite. We propose that these institutions are likely to emerge and persist when competition between elite factions with dissimilar economic interests is balanced. To address the possibility of endogeneity between elite configurations and public institutions, we leverage natural resource diversity as an instrument for elite configurations. We show that, where geological resources are more diverse, competition between similarly powerful economic groups is more likely to emerge, leading ultimately to the establishment of power-sharing mechanisms that allow elite groups to protect their diverging economic interests.
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