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

Manuel Adelino¹; Igor Cunha²; Miguel A. Ferreira³

¹ Duke University · ² University of Kentucky · ³ Nova School of Business and Economics, ECGI, CEPR

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.

DOI

10.1093/rfs/hhx049

Volume

30 (9)

Pages

3223-3268

Language

en

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BibTeX

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