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

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 govern...

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Bibliographic Details
Published in:The Review of financial studies 2017-09, Vol.30 (9), p.3223-3268
Main Authors: Adelino, Manuel, Cunha, Igor, Ferreira, Miguel A.
Format: Article
Language:English
Subjects:
Bond ratings
Economic conditions
Employment
Expenditures
Financing
Government spending
Local government
Multiplier
Municipal bonds
Ratings & rankings
Studies
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Summary: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.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhx049