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

IMF Working Papers, September 1, 1991

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

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Bibliographic details

• Authors: Morris Goldstein, Geoffrey Woglom
• Published: September 1, 1991
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451851205.001

Concept and Research Question

• 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.

Key Findings

• 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.
• Market perceptions of default risk are linked to observed fiscal policy behavior across states.

Subjects and Keywords

• 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

Implications Highlighted in the Paper

• Markets can impose higher borrowing costs and reduce credit availability for governments with persistent, excessive fiscal deficits.
• These market actions function as incentives for governments to correct irresponsible fiscal behavior.

IMF Working Papers. "Market-Based Fiscal Discipline in Monetary Unions: Evidence From the U.S. Municipal Bond Market", Morris Goldstein and Geoffrey Woglom, September 1, 1991.