Arbitrage and the Savings Behavior of State Governments
AbstractThe federal tax code creates strong incentives for tax arbitrage on the part of state governments. This arbitrage activity is illegal and previous research has typically assumed that the constraint against arbitrage activity is binding. This paper explicitly tests this proposition by considering whether financial asset holdings increase as the yield spread between taxable and tax exempt securities rises. Using a data set on 40 state governments over a seven year period, I find that there is a significant response to changes in the yield spread. One implication of these results is that the Tax Reform Act of 1986, which made even greater efforts to curb arbitrage activity, is likely to be ineffective. Copyright 1990 by MIT Press.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by MIT Press in its journal Review of Economics & Statistics.
Volume (Year): 72 (1990)
Issue (Month): 3 (August)
Contact details of provider:
Web page: http://mitpress.mit.edu/journals/
Other versions of this item:
- Gilbert E. Metcalf, 1991. "Arbitrage and the Savings Behavior of State Governments," NBER Working Papers 3017, National Bureau of Economic Research, Inc.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Engle, Robert F., 1984. "Wald, likelihood ratio, and Lagrange multiplier tests in econometrics," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 13, pages 775-826 Elsevier.
- Metcalfe, G.E., 1988. "Federal Tax Policy And Municipal Financial Behavior," Papers 29, Princeton, Woodrow Wilson School - Discussion Paper.
- Roger H. Gordon & Joel B. Slemrod, 1986.
"An Empirical Examination of Municipal Financial Policy,"
in: Studies in State and Local Public Finance, pages 53-82
National Bureau of Economic Research, Inc.
- Roger H. Gordon & Joel Slemrod, 1985. "An Empirical Examination of Municipal Financial Policy," NBER Working Papers 1599, National Bureau of Economic Research, Inc.
- Edward M. Gramlich, 1978. "State and Local Budgets the Day after It Rained: Why Is the Surplus So High?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(1), pages 191-216.
- James M. Poterba, 1986. "Explaining the Yield Spread between Taxable and Tax-exempt Bonds : The Role of Expected Tax Policy," NBER Chapters, in: Studies in State and Local Public Finance, pages 5-52 National Bureau of Economic Research, Inc.
- Hausman, Jerry A. & Taylor, William E., 1981. "A generalized specification test," Economics Letters, Elsevier, vol. 8(3), pages 239-245.
- Maria Cornachione Kula, 2004. "U.S. States, the Medicaid Program, and Tax Smoothing," Southern Economic Journal, Southern Economic Association, vol. 70(3), pages 490-511, January.
- Metcalf, Gilbert E., 1993.
"Federal taxation and the supply of state debt,"
Journal of Public Economics,
Elsevier, vol. 51(3), pages 269-285, July.
- Rodolfo Apreda, 2003. "On the Extent of Arbitrage Constraints within Transaction Algebras (A non-standard approach)," CEMA Working Papers: Serie Documentos de Trabajo. 239, Universidad del CEMA.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Karie Kirkpatrick).
If references are entirely missing, you can add them using this form.