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

Manuel Adelino, Igor Cunha and Miguel Ferreira ()

No 11811, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Credit ratings; Government Employment; Income; Local Economy; Municipal Bonds; Private Employment; Public Finance (search for similar items in EconPapers)
JEL-codes: E24 G24 G28 H74 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-pub and nep-ure
Date: 2017-01
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