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Spread between the Moody’s Aaa-Rated Corporate Bond Yield and the Yield on Municipals: Co-integration Analysis

Author

Listed:
  • Richard J. Cebula

    (George Mason University)

  • Don Capener

    (Utah Valley University)

  • Maggie Foley

    (Jacksonville University)

  • Robert Boylan

    (Jacksonville University)

Abstract

While the research linking interest rates to government deficits is extensive, the impact of other tax-related variables is uncommon. This study seeks to add to the literature on credit markets by exploring the impact of not only the budget deficit but also average effective personal income tax rates and personal income tax evasion as explanatory variables. To the best of our knowledge this study is the first study to recognize the joint importance of all of these fiscal variables. We utilize data covering the post-Bretton Woods period from 1971 through 2016 to analyze the impact of the three variables in order to shed light on the spread between the real interest rate yields on Moody’s Aaa-rated corporate bonds and high quality municipal bonds. Estimations reveal that the higher the average effective federal personal income tax rate, the greater the differential between the yields on corporate bonds and tax-free Municipals. Furthermore, it is found that the higher the adjusted gross income gap, the greater the real yield spread between Moody’s Aaa-rated corporate bonds and high quality municipal bonds. Finally, the greater the primary budget deficit, the greater the spread as well.

Suggested Citation

  • Richard J. Cebula & Don Capener & Maggie Foley & Robert Boylan, 2020. "Spread between the Moody’s Aaa-Rated Corporate Bond Yield and the Yield on Municipals: Co-integration Analysis," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 48(2), pages 175-184, June.
    • Handle: RePEc:kap:atlecj:v:48:y:2020:i:2:d:10.1007_s11293-020-09668-0
    DOI: 10.1007/s11293-020-09668-0
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    References listed on IDEAS

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    1. Bharat R. Kolluri & Rao N. Singamesetti & P. A. V. B. Swamy, 1988. "What do regressions of interest rates on deficits imply?," Finance and Economics Discussion Series 3, Board of Governors of the Federal Reserve System (U.S.).
    2. Joe Peek & James A. Wilcox, 1986. "Tax rates and interest rates on tax-exempt securities," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 29-41.
    3. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
    4. Richard J. Cebula, 2018. "Reflections on and Inquiry into Unfamiliar as well as Familiar Factors that may Influence the Market for Municipal Bonds," The Review of Regional Studies, Southern Regional Science Association, vol. 48(2), pages 145-154, Summer.
    5. James R. Barth & George Iden & Frank S. Russek, 1984. "Do Federal Deficits Really Matter?," Contemporary Economic Policy, Western Economic Association International, vol. 3(1), pages 79-95, September.
    6. Richard J. Cebula & Fabrizio Rossi & Fiorentina Dajci & Maggie Foley, 2016. "Financial market determinants of the real cost of funds to public corporations in the US," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 8(1), pages 2-12, April.
    7. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
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    Cited by:

    1. Richard J. Cebula, 2020. "Financial Economics Meets Tax Policy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 48(2), pages 143-146, June.

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