Trade liberalization and municipal financing costs

Chunbo Liu, Liang Xu, Liuming Yang and Yang Zhou

Journal of Banking & Finance, 2025, vol. 178, issue C

Abstract: This study examines the effects of trade liberalization on municipal financing costs. Using the granting of permanent normal trade relations (PNTR) to China as an exogenous shock, we find that U.S. counties that are more exposed to trade liberalization issue bonds with significantly higher tax-adjusted yield spreads. Moreover, these counties pay higher gross spreads and are less likely to issue bonds after PNTR. We also show that secondary market yield spreads increase significantly in response to the U.S. granting of PNTR to China. In addition, we provide evidence that a reduction in debt serving capacity serves as a channel underlying the trade shock effects. Our findings highlight the costs of trade liberalization for public finance.

Keywords: Trade liberalization; Municipal bonds; Debt serving capacity (search for similar items in EconPapers)
JEL-codes: F13 F65 G12 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:178:y:2025:i:c:s037842662500144x

DOI: 10.1016/j.jbankfin.2025.107524

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