The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration
نویسندگان
چکیده
We show that municipalities’ credit constraints can have important effects on local economies through a ratings channel. We identify these effects by exploiting exogenous variation on U.S. municipal bond ratings due to Moody’s recalibration of its ratings scale in 2010. We find that local governments increase expenditures and employment due to an expansion of their debt capacity following a rating upgrade. These increases in local government spending have a local income multiplier of 2.4 and a cost per job of $21,000. Our findings suggest that debt-financed increases in local government spending can improve economic conditions during recessions. JEL classification: E24, G24, G28, H74
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