The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration
84 Pages Posted: 12 Dec 2014 Last revised: 13 Mar 2017
Date Written: March 5, 2017
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.
Keywords: Municipal bonds, Credit ratings, Local demand, Government employment, Private employment, Income
JEL Classification: E24, G24, G28, H74
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