Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930

45 Pages Posted: 13 Oct 2009 Last revised: 12 Aug 2010

See all articles by Andre Martinez

Andre Martinez

Banco de México

Aldo Musacchio

Brandeis University- International Business School; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: October 2009


In 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.

Suggested Citation

Martinez Fritscher, Andre C. and Musacchio, Aldo, Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930 (October 2009). NBER Working Paper No. w15411. Available at SSRN: https://ssrn.com/abstract=1486547

Andre C. Martinez Fritscher

Banco de México ( email )

Av. 5 de Mayo 18
Piso 4
Mexico City, 06059

Aldo Musacchio (Contact Author)

Brandeis University- International Business School ( email )

415 South Street MC 32
Waltham, MA 02454-9110
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/aldo_musacchio

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