Sunday, April 29, 2012

The Uncharted Territory of Debt Mismanagement


Debt mismanagement has become a transatlantic problem, and rule by leftist governments appears to make the problem worse, according to Alesina:
By the spring of 2010, California’s sovereign spread relative to Virginia’s grew by almost 150 basis points while Greece’s spread relative to Germany’s grew by almost 1000 basis points. The spreads in Europe are larger but even in the US they are not insignificant (see Figures; note that the scales are different). ...

Unexpected deficits are correlated with higher state bond yields. After the 2008 credit-market seizure, however, the effect interacts more intensely with interstate variations in political institutions. Specifically, the higher-yield effect is larger for states with left-leaning political systems.

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