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Do Credit Markets Discipline Sovereign Borrowers? Evidence from US States

Author

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  • Bayoumi, Tamim
  • Goldstein, Morris
  • Woglom, Geoffrey

Abstract

The degree to which credit markets discipline sovereign borrowers is investigated by estimating the supply curve for debt faced by US states. The results generally support an optimistic view of the market discipline hypothesis, with credit markets providing incentives for sovereign borrowers to restrain borrowing. While the risk premium on bond yields is estimated to increase only gradually at low levels of debt, this effect appears to become much larger as debt rises. There is also some evidence that credit markets may withhold access to credit at very high levels of debt.

Suggested Citation

  • Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from US States," CEPR Discussion Papers 1088, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1088
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    Keywords

    Credit Market; Fiscal Discipline;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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