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Do Debt Levels Influence State Borrowing Costs?

Authors


Mark D. Robbins is professor in the Department of Public Policy at the University of Connecticut. He conducts research and teaches in the area of public budgeting and fi nance. His research focuses on public preferences for taxing and spending and on public debt.
E-mail:mark.robbins@uconn.edu

Bill Simonsen is professor in the Department of Public Policy at the University of Connecticut. His research and writing focuses on public sector fi nancial management and policy and has two main themes: ways to aid public management decisions about municipal bond sales, and processes that improve the ways that citizen preferences can be used in public decisions.
E-mail:william.simonsen@uconn.edu

Abstract

This article reports on research into the possible interest cost penalties when state governments impose increasingly high debt levels on their citizens. The potential effect of debt levels on borrowing costs is a material one, given the large amounts of state debt outstanding. At the same time that government borrowing is heavy, the demand for government obligations also appears to be strong. The authors examine state debt levels and borrowing costs over a six-year period (2001–2006) and find little evidence of such an effect, despite rapidly growing debt burdens. Those concerned about state debt levels, the authors say, must look to sources other than investors for pressure to reduce debt issuance.

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