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A Visible Hand? Bond Markets, Political Parties, Balanced Budget Laws, and State Government Debt
Author(s) -
Lowry Robert C.
Publication year - 2001
Publication title -
economics and politics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.822
H-Index - 45
eISSN - 1468-0343
pISSN - 0954-1985
DOI - 10.1111/1468-0343.00083
Subject(s) - debt , bond , state (computer science) , politics , government (linguistics) , work (physics) , government bond , economics , government debt , bond market , carry (investment) , monetary economics , empirical research , law , finance , political science , mechanical engineering , linguistics , philosophy , algorithm , epistemology , computer science , engineering
Recent empirical work demonstrates that fiscal institutions in American states have real effects on state government bond rates, but the causal mechanisms have not been identified. We show how laws that restrict state governments' ability to carry forward a deficit improve the ability of investors to extract information from noisy signals. This affects the response of bond markets to repeated deficits in states that have these laws. We argue that partisan preferences for higher spending also increase risk for investors, leading to higher interest rates. We provide empirical support for our hypotheses using data from 1973–1995.