Market Disciplining of the Developing Countries’ Sovereign Governments

This paper contributes to the literature on market disciplining of the sovereign governments in two ways: Firstly, it distinguishes the both sides of the market discipline hypothesis (MDH) by adopting three-stage least square estimation (3SLS) to incorporate the contemporaneous feedback effects between primary structural budget balances and country default risk premium. Secondly, by utilizing the IMF’s disaggregated government finance statistics data, primary structural budget balances are estimated to test the MDH for developing countries. The findings show that only one half of the MDH works: We find robust evidence that increased budget balances contributed to the decrease in country default risk premium , but do not find robust evidence that the change in country default risk premium had a significant effect on budget balances. JEL Classification: C5; G1, G3