When technocratic appointments signal credibility

Alexiadou, Despina and Spaniel, William and Gunaydin, Hakan (2021) When technocratic appointments signal credibility. Comparative Political Studies, 55 (3). pp. 386-419. ISSN 0010-4140 (https://doi.org/10.1177/00104140211024288)

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Abstract

How do prime ministers manage investors' expectations during financial crises? We take a novel approach to this question by investigating ministerial appointments. When prime ministers appoint technocrats, defined as non-partisan experts, they forgo political benefits and can credibly signal their willingness to pay down their debt obligations. This reduces bond yields, but only at times when the market is sensitive to expected repayments---i.e., during crises. To examine the theory, we develop an event study analysis that employs new data on the background of finance ministers in 21 Western and Eastern European democracies. We find that investors reward technocratic appointments by reducing a country's borrowing costs. Consistent with the theory, technocratic appointments under crises predict lower bond yields. Our findings contribute to the literature on the interplay of financial markets and domestic politics.

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