The Municipal Government Channel of Monetary Policy

83 Pages Posted: 22 Dec 2022

See all articles by Matthew Wilson

Matthew Wilson

University of Michigan at Ann Arbor - Department of Economics

Abstract

Monetary policy in the U.S. affects borrowing costs for state and local governments, incentivizing municipal borrowing and spending, which in turn affects economic outcomes. Using municipal bond indices and transaction-level data, I find that responses to monetary policy are dampened relative to treasuries and heterogeneous across location, risk, and liquidity. In my baseline estimate, muni yields move 22bp after a 100bp monetary shock. To study implications for local fiscal policy, I model U.S. localities as small open economies in a monetary union with independent fiscal agents. In a calibrated model, monetary transmission is significantly affected by municipal borrowing costs.

Keywords: Monetary policy, state and local governments, municipal bonds, small open economies, Fiscal policy

Suggested Citation

Wilson, Matthew, The Municipal Government Channel of Monetary Policy. Available at SSRN: https://ssrn.com/abstract=4309877 or http://dx.doi.org/10.2139/ssrn.4309877

Matthew Wilson (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

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