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Market-Based Fiscal Discipline in Monetary Unions: Evidence From the U.S. Municipal Bond Market

Author

Listed:
  • Mr. Morris Goldstein
  • Geoffrey Woglom

Abstract

The concept of market-based fiscal discipline posits that a government which runs persistent, excessive fiscal deficits will face an increased cost of borrowing and eventually, a reduced availability of credit, and that these market actions will provide an incentive to correct irresponsible fiscal behavior. This paper presents new empirical evidence on market-based fiscal discipline by estimating the relationship between the cost of borrowing and fiscal policy behavior across U.S. states. We find that U.S. states which have followed more prudent fiscal policies are perceived by the market as having lower default risk and are therefore able to reap the benefit of lower borrowing costs.

Suggested Citation

  • Mr. Morris Goldstein & Geoffrey Woglom, 1991. "Market-Based Fiscal Discipline in Monetary Unions: Evidence From the U.S. Municipal Bond Market," IMF Working Papers 1991/089, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1991/089
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    Cited by:

    1. Oliveira, Luís & Curto, José Dias & Nunes, João Pedro, 2012. "The determinants of sovereign credit spread changes in the Euro-zone," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 278-304.
    2. Fournier, Jacques, 1995. "EMU and France," MPRA Paper 90410, University Library of Munich, Germany.
    3. Falagiarda, Matteo & Reitz, Stefan, 2013. "Announcements of ECB unconventional programs: Implications for the sovereign risk of Italy," Kiel Working Papers 1866, Kiel Institute for the World Economy (IfW Kiel).
    4. Tamim Bayoumi and Barry Eichengreen., 1992. "Is There a Conflict Between EC Enlargement and European Monetary Unification?," Economics Working Papers 92-188, University of California at Berkeley.
    5. Jean Pisani-Ferry & Claude Bismut, 1993. "L'union économique et monétaire : principes et implications," Revue Économique, Programme National Persée, vol. 44(1), pages 121-142.
    6. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers 643, C.E.P.R. Discussion Papers.
    7. Hattori, Takahiro & Miyake, Hiroki, 2015. "Empirical Analysis of Yield Determinants in Japan’s Municipal Bond Market: Does Credit Risk Premium Exist?," MPRA Paper 67127, University Library of Munich, Germany.
    8. Debarsy, Nicolas & Dossougoin, Cyrille & Ertur, Cem & Gnabo, Jean-Yves, 2018. "Measuring sovereign risk spillovers and assessing the role of transmission channels: A spatial econometrics approach," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 21-45.
    9. Tiff Macklem & David Rose & Robert Tetlow, "undated". "GOVERNMENT DEBT AND DEFICITS IN CANADA: A Macro Simulation Analysis," Staff Working Papers 95-4, Bank of Canada.
    10. Rudiger Dornbusch & Pierre Jacquet, 1992. "La France et l'Union économique et monétaire européenne," Revue de l'OFCE, Programme National Persée, vol. 39(1), pages 31-73.
    11. Barry Eichengreen., 1992. "The Political Economy of Fiscal Policy After EMU," Center for International and Development Economics Research (CIDER) Working Papers C92-004, University of California at Berkeley.
    12. Umberto Muratori, 2014. "Contagion in the Euro Area Sovereign Bond Market," Social Sciences, MDPI, vol. 4(1), pages 1-17, December.
    13. Christiane Nickel & Philipp Rother & Jan-Christoph Ruelke, 2011. "Fiscal variables and bond spreads - evidence from Eastern European countries and Turkey," Applied Financial Economics, Taylor & Francis Journals, vol. 21(17), pages 1291-1307.
    14. Jacob A. Frenkel & Morris Goldstein, 1991. "The macroeconomic policy implications of trade and currency zones," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 157-235.
    15. Nicolas Afflatet, 2019. "Public Interest Payments and Bond Yields: A Panel Data Estimation for the Eurozone," Applied Economics and Finance, Redfame publishing, vol. 6(1), pages 109-117, January.
    16. Wildmer Daniel Gregori & Wildmer Agnese Sacchi, 2016. "Has the Grexit news spilled over into euro area financial markets? The role of domestic political leaders, supranational executives and institutions," Mo.Fi.R. Working Papers 134, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    17. Gregori, Wildmer Daniel & Sacchi, Agnese, 2019. "Has the Grexit news affected euro area financial markets?," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 71-84.
    18. Jonathan Millar, 1997. "The Effects of Budget Rules on Fiscal Performance and Macroeconomic Stabilization," Staff Working Papers 97-15, Bank of Canada.

    More about this item

    Keywords

    WP; default risk; debt variable; market yield; trend debt growth; debt stock; supply curve; yield spread; default premium; simultaneity issue; expected return; promised yield; specification issue; Debt default; Bonds; Municipal bonds; Government asset and liability management; Europe;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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