Budget Transparency and Financial Markets

Dec 21, 2011

The link between transparency and financial markets has received considerable attention in the recent years. This paper sheds some light on this issue using an indicator of budget transparency based on a comprehensive global survey conducted by the International Budget Partnership in 2008. Our findings suggest that budget transparency matters for financial markets. In particular, more transparent countries, after controlling for various economic variables, have higher credit ratings and lower spreads. Further, for countries with similar credit ratings, higher transparency is associated with lower spreads. We find limited evidence that more transparent countries are less likely to be downgraded given excessively high spreads. Finally, the change in spreads is smaller for more transparent countries compared to less transparent countries.