Moving markets? Government bond investors and microeconomic policy changes

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. K E Y W O R D S corporate tax policy, credit default swaps, event study, finance, labor policy, sovereign debt < International political economy 198 | MOSLEY Et aL. | 199MOSLEY Et aL. do not rely on daily trading data or offer a theoretical logic to explain why this should be the case. Indeed, Mosley (2003) assumed that investors hold clear preferences over government policies-macroeconomic as well as microeconomic-but that investors sometimes ignore a subset of those policies, as part of their attempts to economize on the collection and evaluation of information. Here, by contrast, we provide an account in which investors may be attentive to microeconomic policies as well, but in which they do not agree about how these policies matter for macroeconomic outcomes. We empirically test the central implication of this account, and the standard economic model underlying it: That microeconomic policy changes, even substantively large ones, have little systematic effect on investors' aggregate evaluations of default risk even when measured with daily price data.

Delegating Discipline: How Indexes Restructured the Political Economy of Sovereign Bond Markets

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Economic crisis, global financial cycles and state control of finance: public development banking in Brazil and South Africa

“…The opposite occurs during high interest rate periods (Akyüz, 2017;Bauerle Danzman et al, 2017;Rey, 2015). Furthermore, while substantial evidence exists that international financial markets react directly to key macroeconomic outcomes such as debt, growth and inflation, Mosley et al (2020) show that the same does not hold for microeconomic supply-side policies. Despite being scapegoated by governments as a key impetus for supply-side reforms such as financial, labour market or tax policies, foreign investors do not actually react to these systematically (Mosley et al, 2020).…”

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