DP1088 Do Credit Markets Discipline Sovereign Borrowers? Evidence from US States

Author(s): Tamim Bayoumi, Morris Goldstein, Geoffrey Woglom
Publication Date: January 1995
Keyword(s): Credit Market, Fiscal Discipline
JEL(s): G12, H74
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1088

The degree to which credit markets discipline sovereign borrowers is investigated by estimating the supply curve for debt faced by US states. The results generally support an optimistic view of the market discipline hypothesis, with credit markets providing incentives for sovereign borrowers to restrain borrowing. While the risk premium on bond yields is estimated to increase only gradually at low levels of debt, this effect appears to become much larger as debt rises. There is also some evidence that credit markets may withhold access to credit at very high levels of debt.