POLITICAL INSTABILITY AND DEBT MATURITY

Abstract

Political instability has been blamed for many poor macroeconomic outcomes such as high inflation, unemployment and low growth. I propose yet another negative consequence of political instability: political instability and polarization generate inflation uncertainty which causes the term structure to steepen, consequently political instability and polarization reduce the average maturity and increase the expected cost of debt. A model is derived which illustrates these relationships. Political instability and polarization are then proxied and shown to be inversely related to debt maturity for a sample of OECD countries.