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Financial markets, fiscal constraints, and municipal debt: lessons and evidence from the panic of 1873

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  • DOVE, JOHN A.

Abstract

The current paper explores the municipal debt crisis that resulted from the panic of 1873, which caused a significant number of local governments in the United States to default on their debt obligations. The aftermath of that episode was one of constitutional change meant to constrain municipal governments from pursuing similar activities in the future. This paper empirically investigates the impact that these restrictions had on municipal borrowing costs, analyzed from bond yield data taken from several major US financial markets, so as to evaluate how binding and significant markets actually perceived these constraints to be. Overall, the results suggest that borrowing costs were lower for municipal governments that faced more stringent creditor guarantees regarding the issuing and repayment of debt, hard budget constraints, and also strict debt limits, while tax limits generally increased borrowing costs. These results not only conform too much of the current literature regarding the political economy of institutional constraints on public finance, they also add several important insights, especially when comparing defaulting to non-defaulting municipalities.

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  • Dove, John A., 2014. "Financial markets, fiscal constraints, and municipal debt: lessons and evidence from the panic of 1873," Journal of Institutional Economics, Cambridge University Press, vol. 10(1), pages 71-106, March.
    • Handle: RePEc:cup:jinsec:v:10:y:2014:i:01:p:71-106_00
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    Cited by:

    1. Johann Bröthaler & Michael Getzner & Gottfried Haber, 2015. "Sustainability of local government debt: a case study of Austrian municipalities," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(3), pages 521-546, August.
    2. John A. Dove, 2017. "Property Tax Limits, Balanced Budget Rules, and Line-Item Vetoes: A Long-Run View," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 43(2), pages 288-317, March.
    3. Fred Thompson & Kawika Pierson & Michael L. Hand & Michael U. Dothan, 2017. "Is a Good Normative Model of Public Spending Run Backward a Good Positive Model?," Public Budgeting & Finance, Wiley Blackwell, vol. 37(2), pages 35-57, June.
    4. Dove, John A., 2018. "It's easier to contract than to pay: Judicial independence and US municipal default in the 19th century," Journal of Comparative Economics, Elsevier, vol. 46(4), pages 1062-1081.

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