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American Economic Journal: Economic Policy: Vol. 4 No. 2 (May 2012)

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Fiscal Imbalances and Borrowing Costs: Evidence from State Investment Losses

Article Citation

Novy-Marx, Robert, and Joshua D. Rauh. 2012. "Fiscal Imbalances and Borrowing Costs: Evidence from State Investment Losses." American Economic Journal: Economic Policy, 4(2): 182-213.

DOI: 10.1257/pol.4.2.182

Abstract

During the last quarter of 2008, financial losses in state pension funds varied from 12 percent to 68 percent of the revenue generated by the state government. We quantify a sovereign default channel in the state municipal market by examining how changes in bond spreads vary with state pension fund losses, controlling for credit ratings and various measures of the state's fiscal strength. Municipal bond spreads rose by 7-15 basis points for each 10 percent of state-generated revenue lost by states in the lower half of the credit quality spectrum. (JEL H71, H72, H74, H75)

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Authors

Novy-Marx, Robert (U Rochester)
Rauh, Joshua D. (Northwestern U)

JEL Classifications

H71: State and Local Taxation, Subsidies, and Revenue
H72: State and Local Budget and Expenditures
H74: State and Local Borrowing
H75: State and Local Government: Health; Education; Welfare; Public Pensions

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