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Fiscal Imbalances and Borrowing Costs: Evidence from State Investment Losses

55 Pages Posted: 18 Nov 2009 Last revised: 30 Mar 2011

Robert Novy-Marx

Simon Business School, University of Rochester; National Bureau of Economic Research (NBER)

Joshua D. Rauh

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Date Written: March 21, 2011

Abstract

During the last quarter of 2008, state pension funds fell in value by approximately $350 billion. Depending on the state, the losses were equivalent to as little as 12% of the own revenue (taxes, fees, and charges) generated by the state government in the previous fiscal year, or as much as 68%. We quantify a sovereign default channel in the state municipal market by examining how changes in bond spreads vary with state pension fund losses, controlling for credit ratings and various measures of the state’s fiscal strength. Municipal bond spreads rose by 7-15 basis points for each 10% of state-generated revenue lost by states in the lower half of the credit quality spectrum.

Keywords: fiscal imbalances, deficits, public debt, interest rates, borrowing costs, public employee pensions, public pension funds

JEL Classification: E62, G23, H55, H63, 72, H74

Suggested Citation

Novy-Marx, Robert and Rauh, Joshua D., Fiscal Imbalances and Borrowing Costs: Evidence from State Investment Losses (March 21, 2011). Available at SSRN: https://ssrn.com/abstract=1507800 or http://dx.doi.org/10.2139/ssrn.1507800

Robert Novy-Marx

Simon Business School, University of Rochester ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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