Default, Borrowing Costs, and Fiscal Constitutions

An extensive literature addresses how fiscal constraints impact government debt and borrowing costs. This study evaluates the historical development of those institutions across U.S. state governments during the nineteenth century, and considers how they influenced borrowing costs for both defaulting and non-defaulting states. The empirical exercise roughly covers the Reconstruction era, which as a direct result of the Civil War witnessed every former Confederate state default and even repudiate much of their outstanding debts. Overall, the results suggest that more binding restrictions most consistently lowered borrowing costs for defaulters and non-defaulters alike. These results are robust to a number of specifications.

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