Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930
AbstractIn the last few years there has been an explosion in the number of papers that aim to explain what determines country risk (defined as the difference between the yield of a sovereign’s bonds and the risk free rate). In this paper, we contribute to the discussion using by showing that Brazilian states with natural endowments that allowed them to export commodities that were in high demand (e.g., rubber and coffee) between 1891 and 1930 ended up having higher revenues per capita and, thus, lower cost of capital. The link between exports and state government revenues works in the Brazilian case because of the extreme form of fiscal federalism that the Brazilian government adopted in the Constitution of 1891, giving state governments the sole right to tax exports. We create a panel of state debt risk premia and a series of state level fiscal variables and we show, using OLS, that having specific commodities gave states access capital in better terms (i.e., lower risk premium) in international markets. We also confirm our results that states with better commodities had lower risk premia when we use export price indices for each of the states as instruments for state revenue per capita.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15411.
Date of creation: Oct 2009
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Other versions of this item:
- Martinez Fritscher, André C. & Musacchio, Aldo, 2010. "Endowments, fiscal federalism and the cost of capital for states: evidence from Brazil, 1891–1930," Financial History Review, Cambridge University Press, vol. 17(01), pages 13-50, April.
- André Martínez & Aldo Musacchio, 2009. "Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930," Working Papers 2009-12, Banco de México.
- Andre Martínez-Fritscher & Aldo Musacchio, 2009. "Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930," Harvard Business School Working Papers 10-027, Harvard Business School, revised Dec 2009.
- H4 - Public Economics - - Publicly Provided Goods
- H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
- N0 - Economic History - - General
- N16 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Latin America; Caribbean
- N96 - Economic History - - Regional and Urban History - - - Latin America; Caribbean
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