Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930

Andre Martínez-Fritscher () and Aldo Musacchio
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Andre Martínez-Fritscher: Banco de México
Authors registered in the RePEc Author Service: André Carlos Martínez Fritscher

No 10-027, Harvard Business School Working Papers from Harvard Business School

Abstract: There is a large literature that aims to explain what determines country risk (defined as the difference between the yield of a sovereign's bonds and the risk free rate). In this paper, we contribute to the discussion by arguing that an important explanatory factor is the impact that commodities have on the capacity to pay. We use a newly created data base with state-level fiscal and risk premium data for Brazil states between 1891 and 1930 to show that Brazilian states with natural endowments that allowed them to export commodities that were in high demand (e.g., rubber and coffee) ended up having higher revenues per capita and, thus, lower cost of capital. We also explain that the variation in revenues per capita was both a product of the variation in natural endowments (i.e., the fact that states cannot produce any commodity they want) and a commodity boom that had asymmetric effects among states. These two effects generated variation in revenues per capita at the state level thanks to the extreme form of fiscal decentralization that the Brazilian government adopted in the Constitution of 1891, which gave states the sole right to tax exports. We end by running instrumental variable estimates using indices of export prices for each state to instrument for revenues per capita. Our IV estimates confirm our results that states with commodities that had higher price increases had lower risk premia.

Pages: 45 pages
Date: 2009-10, Revised 2009-12
New Economics Papers: this item is included in nep-his and nep-pbe
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Related works:
Working Paper: Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930 (2009)
Working Paper: Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930 (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hbs:wpaper:10-027

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