With a shutdown, the government could lose the market’s trust

What are the economic consequences of a government shutdown? Washington Post economic columnist Ezra Klein cites an EPRU-working paper on the economic consequences of late budgets in his latest column, and goes on to argue that the looming government shutdown in the US can damage markets’ trust in US treasuries, eventually leading to higher treasury yields.

Asger Lau Andersen, David Dreyer Lassen and Lasse Holbøll Westh Nielsen have analyzed the economic consequences of not passing budgets on time in US states in an EPRU working paper, available here. They find, using unique data on US state government budget negotiations, that late budgets lead to higher yield spreads on US state government debt, and that these effects are larger when reserves are small and in times of fiscal stress.