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

September 1, 1991

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Format: Chicago

Morris Goldstein, and Geoffrey Woglom. Market-Based Fiscal Discipline in Monetary Unions: Evidence From the U.S. Municipal Bond Market, (USA: International Monetary Fund, 1991) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Bonds, Debt default, External debt, Financial institutions, Fiscal policy, Government asset and liability management, Municipal bonds, Public financial management (PFM)

Keywords: Bonds, Debt default, Debt stock, Debt variable, Default premium, Default risk, Europe, Expected return, Government asset and liability management, Market yield, Municipal bonds, Promised yield, Simultaneity issue, Specification issue, Supply curve, Trend debt growth, WP, Yield spread

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1991/089
Stock No:

WPIEA0891991
ISBN:

9781451851205
ISSN:

1018-5941

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