infonet-economy

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