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How does credit market innovation affect the fiscal policy of state governments?

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  • Hsien-Yi Chen

    (Providence University)

  • Sheng-Syan Chen

    (National Taiwan University)

Abstract

We investigate whether the introduction of state credit default swaps (CDS) affects the fiscal spending of state governments. A difference-in-differences analysis indicates that CDS-referenced states show a significant decline in government spending compared to non-CDS-referenced states when state CDS issuance introduces a more transparent fiscal information environment. We also find an improvement in state media coverage post-CDS-initiation. The results suggest that CDS initiation can provide valuable information for the fiscal conditions of state governments, which in turn leads to spending cuts. The evidence indicates the important role that credit market innovation activities play in the fiscal decisions of state governments.

Suggested Citation

  • Hsien-Yi Chen & Sheng-Syan Chen, 2024. "How does credit market innovation affect the fiscal policy of state governments?," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 389-420, February.
    • Handle: RePEc:kap:rqfnac:v:62:y:2024:i:2:d:10.1007_s11156-023-01207-7
    DOI: 10.1007/s11156-023-01207-7
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    More about this item

    Keywords

    State credit default swaps; Financial innovation; Media coverage; Fiscal transparency; Government spending;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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