Agency independence and credibility in primary bond markets

Vast literature studies Independent Regulatory Agencies (IRAs). We contribute by studying the benefits of independence when the agent's work is relational and by studying developing and developed democracies worldwide and over many years. We do this by studying national Debt Management Offices (DMOs)-the state agencies that plan, issue, and manage national debt. DMOs define the benchmark assets on which capital markets and monetary policy depend-industry standards-and their decisions have allocative implications. We argue that formal independence of DMOs from political decision-makers is a costly signal to large financial institutions on the government's potential to service and repay its debts. We introduce a new country-year dataset of DMO legislation for 75 developing and developed democratic countries in the period 1950-2013. We find that DMO independence is likelier following debt defaults, war, high inflation, and high debts, and that DMO independence increases sovereign debt credibility.