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Fiscal Imbalances and Borrowing Costs: Evidence from State Investment Losses

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  • Robert Novy-Marx
  • Joshua D. Rauh
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    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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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

    Volume (Year): 4 (2012)
    Issue (Month): 2 (May)
    Pages: 182-213

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    Handle: RePEc:aea:aejpol:v:4:y:2012:i:2:p:182-213

    Note: DOI: 10.1257/pol.4.2.182
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    Cited by:
    1. Jean Burson & John Carlson & O. Emre Ergungor & Patricia Waiwood, 2013. "Do public pension obligations affect state funding costs?," Working Paper 1301, Federal Reserve Bank of Cleveland.

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