The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration. (26th May 2017)

• Record Type: Journal Article
• Authors: Adelino, Manuel; Cunha, Igor; Ferreira, Miguel A.
• Is Part Of: Review of financial studies. Volume 30:Number 9(2017:Sep.)
• Page Start: 3223
• Page End: 3268
• Publication Date: 2017-05-26
• Subjects: E24 -- G24 -- G28 -- H74; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhx049
• Languages: English
• ISSNs: 0893-9454

Abstract

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. Received December 14, 2015; editorial decision February 28, 2017 by Editor Andrew Karolyi.