The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration

87 Pages Posted: 30 Jan 2017

See all articles by Manuel Adelino

Manuel Adelino

Duke University; Duke Innovation & Entrepreneurship Initiative; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Igor Cunha

University of Kentucky

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2017

Abstract

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: Credit ratings, Government Employment, Income, Local Economy, Municipal Bonds, Private Employment, Public Finance

JEL Classification: E24, G24, G28, H74

Suggested Citation

Adelino, Manuel and Cunha, Igor and Ferreira, Miguel Almeida, The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration (January 2017). CEPR Discussion Paper No. DP11811. Available at SSRN: https://ssrn.com/abstract=2908224

Duke Innovation & Entrepreneurship Initiative ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Igor Cunha

University of Kentucky ( email )

Gatton College of Business and Economics
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Lexington, KY 40526
United States
859-257-5703 (Phone)

Miguel Almeida Ferreira

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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