The Supply Elasticity Of Municipal Debt: Evidence From Bank-Qualified Bonds

Travis St. Clair

National Tax Journal, 2024, vol. 77, issue 1, 111 - 139

Abstract: This paper provides estimates of the supply elasticity of municipal debt by exploiting a discrete jump in interest rates created by the Tax Reform Act of 1986. To qualify for bank financing of tax-exempt debt, governments can issue no more than $10 million of nominal debt per year. Using bunching methods, I quantify the intensive margin responses to the notch for local governments. The estimates indicate that the average government lowers its borrowing by approximately 5 percent in response to an 8–17 percent increase in interest costs, implying an overall price elasticity of −0.3 to −0.6.

Date: 2024
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