Are There Spillover Effects from Munis?

19 Pages Posted: 12 Dec 2011

See all articles by Rabah Arezki

Rabah Arezki

International Monetary Fund (IMF)

Bertrand Candelon

University of Maastricht - Department of Economics

Amadou Nicolas Racine Sy

International Monetary Fund (IMF) - International Capital Markets Department; Brookings Institution

Date Written: December 2011

Abstract

This paper studies the spillover effects both within the bond markets for individual U.S. states and between the latter and the market for U.S. Treasury securities. We perform the Forbes and Rigobon (2002) spillover test using daily bond yield data over the period 2005 to 2011. Results are twofold. First, we find that between most markets for individual U.S. state bonds there are negative spillovers. In other words, an increase in borrowing costs in one U.S. state results in better borrowing conditions for other states. Second, we find no substantial spillover effect between shocks originating from state securities and from federal markets, except for a few large issuers. Using causality tests in the frequency domain, we find that the Treasury bond market directly causes changes in the markets for municipal bonds in both the short and long run. There is also some evidence of causality from the municipal to the Treasury bond market, but only of a long-run nature. Our results shed some light on the policy debate on the nature of spillover effects within fiscal unions.

Keywords: Bond markets, Bonds, Fiscal analysis, Risk management, Spillovers, United States

Suggested Citation

Arezki, Rabah and Candelon, Bertrand and Sy, Amadou Nicolas Racine, Are There Spillover Effects from Munis? (December 2011). IMF Working Paper No. 11/290, Available at SSRN: https://ssrn.com/abstract=1971441

Rabah Arezki (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Bertrand Candelon

University of Maastricht - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Amadou Nicolas Racine Sy

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Room 9-548
Washington, DC 20431
United States
202-623-8651 (Phone)
202-589-8561 (Fax)

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

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