Democracy, Transparency, and Confidence Crisis in International Credit Markets.

Do democratic institutions help a country avoid a confidence crisis triggered by a self-fulfilling belief in sovereign bond markets? More democratic governments are more transparent, and the more accurate public information that they provide about the economy helps reduce individual creditors' uncertainty about each others' beliefs. Therefore, unless the economy is expected to be very bad, more democratic countries are less likely to suffer a sudden stop of bond flows. When the expected economic situation is dismal, however, being more transparent, democracy can have a detrimental effect, worsening the probability of a confidence crisis. Empirical analysis of the incidence of a sudden stop of loan disbursements from bond markets in a sample of developing countries provides strong support for the claim. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]