Economic Freedom and State Bond Ratings

Abstract

Are state bond ratings, ceteris paribus, related to economic freedom? We test for the relationship between economic freedom and an aggregate index comprised of ratings by Standard & Poor, Moody's, and Fitch. We also test for a relationship between economic freedom and the ratings by these three agencies individually. With a sample covering all 50 states for the period 1995-2008, the evidence strongly indicates that state bond ratings are positively and significantly related to overall economic freedom as well as three sub-categories of economic freedom. Our results show that the quantitative impact of economic freedom on bond ratings is comparable to the effect of state real income and the unemployment rate.