ABSTRACT
This chapter explores how the credibility-building effects of democratic political institutions may depend on the governing party's ideological orientation. It explores how institutional improvements toward greater democracy or deterioration toward greater authoritarianism affect sovereign credibility. The chapter addresses the potential endogeneity problem and selection bias in the relationship between democratic institutions and country credit ratings. When it comes to sovereign credibility, democracies are usually considered more likely than autocracies to honor international agreements. Democratic governments are believed to control corruption better than authoritarian ones, which too appeals to many investors. Populism arising from left-wing leaders has been more of a threat to democracy and investment in recent decades. Government transparency is positively associated with sovereign credibility of leftist governments, as the coefficients for transparency are jointly significant at the 5 percent level. Institutional changes may be driven by economic shocks which also affect credit ratings.
