Moving markets? Government bond investors and microeconomic policy changes

Layna Mosley, Victoria Paniagua, Erik Wibbels

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

Do sovereign bond markets react systematically to microeconomic policy reforms? Some observers suggest that investors are very attentive to supply-side policies such as those related to labor markets, corporate taxation, and product standards. They argue that, along with macroeconomic outcomes and broad financial market conditions, such reforms affect sovereign bond premiums, for developed as well as emerging economies. In contrast, we predict few systematic effects of supply-side policy reforms on sovereign bond market outcomes. Our theory draws on a standard three-equation model of the economy, widely accepted among economic and finance professionals. That model makes few clear predictions regarding the anticipated effects of microeconomic policy changes; as a result, we expect that such reforms will not generate systematic market reactions. Our analyses, based on daily data from 37 countries from 2004 to 2012, indeed reveal little evidence of a systematic bond market reaction to the 47 most significant reforms to corporate taxation and labor market regulation. These results call into question the notion that “bond market vigilantes” play a central role in compelling governments to enact specific microeconomic policy changes.

Original languageEnglish (US)
Pages (from-to)197-249
Number of pages53
JournalEconomics and Politics
Volume32
Issue number2
DOIs
StatePublished - Jul 1 2020
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • corporate tax policy
  • credit default swaps
  • event study
  • finance
  • labor policy
  • sovereign debt < International political economy

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