The economic effects of public financing: evidence from municipal bond ratings recalibration

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Abstract

We show that municipalities’ financial constraints can have a significant impact on local employment and growth. We identify these effects by exploiting exogenous upgrades in U.S. municipal bond ratings caused by Moody’s recalibration of its ratings scale in 2010. We find that local governments increase expenditures because their debt capacity expands following a rating upgrade. These expenditures have an estimated local income multiplier of 1.9 and a cost per job of $20,000 per year. Our findings suggest that debt-financed increases in government spending can improve economic conditions during recessions.
Original languageEnglish
Pages (from-to)3223-3268
JournalReview Of Financial Studies
Volume30
Issue number9
DOIs
Publication statusPublished - Sep 2017

Keywords

  • Municipal bonds
  • Credit ratings
  • Local demand
  • Government employment
  • Private employment
  • Income

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