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Title: Municipal Bonds, State Politics, and Economic Outcomes

Citation Type: Miscellaneous

Publication Year: 2015

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Abstract: We find that changes in the credit spreads of state-issued municipal bonds around gubernatorial elections predict future economic outcomes. A 0.203% (one standard deviation) increase in credit spread around an election is associated with a 3.1% decline in state GDP per capita and a 0.06% increase in the state unemployment rate at the end of the elected governor's tenure. As a possible channel of predictability, we show that changes in credit spreads predict fiscal outcomes, such as changes in deficits during the tenure of elected governors. Also, changes in municipal bond credit spreads around gubernatorial elections predict the market value, revenue, and operations of firms locally operating within a state. Our finding is consistent with the idea that quality of government is an important determinant of the cost of state financing, and that investors have access to information on local politics, which is reflected in municipal bond markets.

Url: http://www.bostonfed.org/economic/conf/municipal-finance-2015/papers/simonov.pdf

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Authors: Choi, Jaewon; Picard, Joerg; Simonov, Andrei; Yun, Hayong

Publisher: Federal Reserve Bank of Boston

Data Collections: IPUMS CPS

Topics: Other

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