Do democracies have higher current account deficits?

Abstract

In this paper we argue that democracies tend to run (larger)current account de cits than autocracies. Our argument is based on the di erent incentives faced by democratic and autocratic leaders. The main theoretical hypothesis are tested on a dataset that consists of 121 countries over the period 1980-2012, using ve year averages and a xed e ects panel data model. The empirical ndings suggest that autocracies run lower current account de cits than democracies. Special focus is given in the issue of endogeneity by estimating an IV Fixed E ects model, using as instruments of Democracy the share of Christian adherents in each country and also the level of democracy in neighboring countries. These results are found to be robust across alternative empirical speci cations. Keywords:Current Account, Democracy, Autocracy