The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration
87 Pages Posted: 30 Jan 2017
There are 2 versions of this paper
The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration
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: Suggested Citation
Duke Innovation & Entrepreneurship Initiative ( email )
215 Morris St., Suite 300
Durham, NC 27701
United States
Nova School of Business and Economics ( email )
Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal
Miguel Almeida Ferreira
Nova School of Business and Economics ( email )
Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal
European Corporate Governance Institute (ECGI) ( email )
c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium