How does credit market innovation affect the fiscal policy of state governments?

Hsien-Yi Chen () and Sheng-Syan Chen ()
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Hsien-Yi Chen: Providence University
Sheng-Syan Chen: National Taiwan University

Review of Quantitative Finance and Accounting, 2024, vol. 62, issue 2, No 1, 389-420

Abstract: 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.

Keywords: State credit default swaps; Financial innovation; Media coverage; Fiscal transparency; Government spending (search for similar items in EconPapers)
JEL-codes: E44 E62 G14 H30 H72 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-023-01207-7

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