The municipal government channel of monetary policy

Matthew Wilson ()

Macroeconomic Dynamics, 2025, vol. 29, -

Abstract: Monetary policy in the USA affects borrowing costs for state and local governments, incentivizing municipal borrowing and spending, which in turn affects economic outcomes. Using municipal bond indices and transaction-level data, I find that responses to monetary policy are dampened relative to treasuries and heterogeneous across location and bond characteristics. In my baseline estimate, muni yields move 26 bp after a 100 bp monetary shock. To study implications for local fiscal policy, I model US localities as small open economies in a monetary union with independent fiscal agents. In a calibrated model, monetary transmission is significantly affected by municipal borrowing costs.

Date: 2025
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