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

45 Pages Posted: 20 Dec 2018 Last revised: 14 Jan 2019

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 effect of population aging on state municipal bond issuance cost. A one standard deviation increase in the fraction of population that is 65 or older leads to a 23-24 basis point increase in bond issue yield spread. Reduced personal income tax revenue, increased pension obligations, and increased retiree healthcare liabilities together explain approximately 50% of the effect. We exploit historical trends in birth rates to construct an instrumental variable. The findings suggest that demographic changes impact state governments’ fiscal conditions through affecting their cost of accessing the financial market.

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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