State Fiscal Institutions and the U.S. Municipal Bond Market

43 Pages Posted: 10 Jul 2000 Last revised: 7 Oct 2010

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Kim S. Rueben

Tax Policy Center

Date Written: October 1997

Abstract

This paper presents new evidence on the effect of state fiscal institutions, particularly balanced-budget rules and restrictions on state debt issuance, on the yields on state general obligation bonds. We analyze information from the Chubb Relative Value Survey, which contains relative tax-exempt yields on the bonds issued by different states over the period 1973-1996. We find that states with tighter anti-deficit rules, and more restrictive provisions on the authority of state legislatures to issue debt, pay lower interest rates on their bonds. The interest rate differential between a state with a very strict anti-deficit fiscal constitution, and one with a lax constitution, is between fifteen and twenty basis points. States with binding revenue limits tend to face higher borrowing rates by approximately the same amount, while states with expenditure limits face lower borrowing costs. Thus fiscal restraints that control expenditures are viewed favorably by bond market participants, while those that restrict taxes, and therefore might interfere with the state's ability to repay interest, result in higher borrowing costs. The effect of strict fiscal institutions is particularly evident when a state's economy is weak. These results provide important evidence that bond market participants consider fiscal institutions in assessing the risk characteristics of tax-exempt bonds, and further support the view that fiscal institutions have real effects on fiscal policy outcomes.

Suggested Citation

Poterba, James M. and Rueben, Kim S., State Fiscal Institutions and the U.S. Municipal Bond Market (October 1997). NBER Working Paper No. w6237. Available at SSRN: https://ssrn.com/abstract=225995

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-350
Cambridge, MA 02142
United States
617-253-6673 (Phone)
617-253-1330 (Fax)

Kim S. Rueben

Tax Policy Center ( email )

Urban Institute
2100 M Street NW
Washington, DC 20009
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
95
rank
269,241
Abstract Views
1,935
PlumX Metrics