Working Paper: NBER ID: w15411
Authors: Andr C. Martnez-Fritscher; Aldo Musacchio
Abstract: In the last few years there has been an explosion in the number of papers that aim 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 using by showing that Brazilian states with natural endowments that allowed them to export commodities that were in high demand (e.g., rubber and coffee) between 1891 and 1930 ended up having higher revenues per capita and, thus, lower cost of capital. The link between exports and state government revenues works in the Brazilian case because of the extreme form of fiscal federalism that the Brazilian government adopted in the Constitution of 1891, giving state governments the sole right to tax exports. We create a panel of state debt risk premia and a series of state level fiscal variables and we show, using OLS, that having specific commodities gave states access capital in better terms (i.e., lower risk premium) in international markets. We also confirm our results that states with better commodities had lower risk premia when we use export price indices for each of the states as instruments for state revenue per capita.
Keywords: Endowments; Fiscal Federalism; Cost of Capital; Brazil; Commodity Exports
JEL Codes: H4; H74; N0; N16; N96
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Natural endowments (Q32) | State revenues per capita (H79) |
| State revenues per capita (H79) | Cost of capital (G31) |
| Natural endowments (Q32) | Cost of capital (G31) |
| Commodity prices (Q02) | State revenues per capita (H79) |
| Commodity prices (Q02) | Cost of capital (G31) |
| Natural endowments (Q32) | Risk premiums (G19) |
| State revenues per capita (H79) | Risk premiums (G19) |