Financial Statecraft: Government Choice of Debt Instruments

Working Paper 822

Abstract

We explore the diversity of means by which governments borrow – from commercial banks, sovereign bond issues, official bilateral creditors, and multilateral financial institutions. Although political economy scholars tend to analyze financing instruments in isolation from one another, governments make choices across borrowing instruments. Although these choices partly reflect governments’ macroeconomic profiles and country creditworthiness, they also reflect governments’ efforts to engage in financial statecraft, often for domestic reasons. These motivations include transparency: governments that are inclined not to make available information about the state of their economy and financial institutions will, all else equal, tend to borrow from commercial banks (versus to issue bonds), or to borrow from official bilateral creditors (rather than multilateral ones). Borrowing from these entities imposes fewer disclosure requirements, and disclosures are made to a narrower audience. We test, and find support for, our hypotheses using data on the composition of government debt over time, for a large set of developing countries. We further assess, and again find support for, our expectations using data on the borrowing behavior of Mexican municipalities.