Financial Markets, Fiscal Constraints, and Municipal Debt: Lessons and Evidence from the Panic of 1873

Journal of Institutional Economics, Forthcoming

42 Pages Posted: 19 Jul 2013

See all articles by John A. Dove

John A. Dove

Troy University - Manuel H. Johnson Center for Political Economy

Date Written: July 2013

Abstract

The current paper explores the municipal debt crisis that resulted from the panic of 1873, which caused a significant number of local governments in the U.S. to default on their debt obligations. The aftermath of that episode was one of constitutional change meant to constrain municipal governments from pursuing similar activities in the future. This paper empirically investigates the impact that these restrictions had on municipal borrowing costs, analyzed from bond yield data taken from several major U.S. financial markets, so as to evaluate how binding and significant markets actually perceived these constraints to be. Overall, the results suggest that borrowing costs were lower for municipal governments that faced more stringent creditor guarantees regarding the issuing and repayment of debt, hard budget constraints, and also strict debt limits, while tax limits generally increased borrowing costs. These results not only conform to much of the current literature regarding the political economy of institutional constraints on public finance, they also add several important insights, especially when comparing defaulting to non-defaulting municipalities.

Keywords: fiscal federalism, fiscal institutions, municipal debt, default

JEL Classification: D78, H73, H74, N21

Suggested Citation

Dove, John A., Financial Markets, Fiscal Constraints, and Municipal Debt: Lessons and Evidence from the Panic of 1873 (July 2013). Journal of Institutional Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2295710

John A. Dove (Contact Author)

Troy University - Manuel H. Johnson Center for Political Economy ( email )

Bibb Graves Hall
Troy, AL 36082
United States

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