Aging and Public Financing Costs: Evidence from U.S. Municipal Bond Markets

60 Pages Posted: 20 Dec 2018 Last revised: 27 Oct 2020

See all articles by Alexander W. Butler

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Hanyi Yi

Rice University - Jesse H. Jones Graduate School of Business

Date Written: January 13, 2019

Abstract

We examine the impact of population aging on municipal access to credit. A one standard deviation increase in a state’s population age leads to a 23 basis point increase in municipal bond issue spread. Three mechanisms drive this effect: income tax revenue, healthcare liabilities, and pension underfunding. Constitutional pension protections and securities with lower credit quality or longer maturity exacerbate the effect. To control for endogenous migration and mortality patterns, we exploit variation from historical state fertility trends. Our findings highlight the challenges municipalities face to cope with systemic demographic transition.

Keywords: Municipal Finance, Public Finance, Aging, Public Pensions, Demographics

JEL Classification: G12, G23, H74, H75, J11, J14

Suggested Citation

Butler, Alexander W. and Yi, Hanyi, Aging and Public Financing Costs: Evidence from U.S. Municipal Bond Markets (January 13, 2019). Available at SSRN: https://ssrn.com/abstract=3301648 or http://dx.doi.org/10.2139/ssrn.3301648

Alexander W. Butler (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

Hanyi Yi

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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