How does credit market innovation affect the fiscal policy of state governments?
Journal
Review of Quantitative Finance and Accounting
Date Issued
2023-10
Author(s)
Chen, Hsien Yi
Abstract
We investigate whether the introduction of state credit default swaps (CDS) affects the fiscal spending of state governments. A difference-in-differences analysis indicates that CDS-referenced states show a significant decline in government spending compared to non-CDS-referenced states when state CDS issuance introduces a more transparent fiscal information environment. We also find an improvement in state media coverage post-CDS-initiation. The results suggest that CDS initiation can provide valuable information for the fiscal conditions of state governments, which in turn leads to spending cuts. The evidence indicates the important role that credit market innovation activities play in the fiscal decisions of state governments.
Subjects
Financial innovation | Fiscal transparency | Government spending | Media coverage | State credit default swaps
Publisher
Springer
Type
journal article