Program on Education Policy and Governance Working Papers Series Do (German) State Bond Markets Discount Politics?
نویسندگان
چکیده
To what extent do bond market reactions to an unexpected deficit shock depend on state-specific politics? To answer this question, we calculate German state bond spreads over government benchmark paper using information from Datastream for the period 2006-2010. We test for a variety of institutional and political factors. We find evidence that investors base risk perceptions on state specific economic and institutional characteristics. Further, in left-leaning Eastern German states, an increase in unexpected deficit shock had a greater negative effect on a state’s risk. JEL Codes: E62, G18, G24, H71, H72, H74, H76, H77, N24, and P43 1Corresponding Author
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