Formal Fiscal Rules and Local Government Borrowing Costs

Jonathan Rundle

Municipal Finance Journal, 2011, vol. 32, issue 2, 29 - 51

Abstract: This paper estimates the impact that formal fiscal rules have on the borrowing costs of local governments. To determine the effect that formal debt limitations, tax limitations, and expenditure limitations have on municipal interest rates, the author creates a data set of local government general obligation bond issues from December 2001 through June of 2003. The estimates show that tax limitations, in particular, increase a municipality’s borrowing rate by approximately 5 to 8 basis points. These results suggest that formal fiscal rules can be important factors to municipal market participants when assessing the credit quality of local governments. Further, the results add weight to the more general view that fiscal institutions can have real effects on public fiscal outcomes.

Date: 2011
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