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The changing long‐run linkage between yields on Treasury and municipal bonds and the 1986 Tax Act

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  • William J. Crowder
  • Mark E. Wohar

Abstract

The Tax Act of 1986 changed the tax treatment of tax‐exempt municipal bonds for banks. Since banks were the dominant participant in the municipal bond market until 1986, some believe that this resulted in a breakdown of the long‐run equilibrium relationship between municipal and US Treasury securities of equal maturity. We present evidence that there was a significant structural break in the relationship between municipal and Treasury bonds around the time of the Tax Act. This break is characterized by both a shift in the mean and a flattening of the slope parameter that links the two interest rates in a long‐run equilibrium relationship.

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  • William J. Crowder & Mark E. Wohar, 1999. "The changing long‐run linkage between yields on Treasury and municipal bonds and the 1986 Tax Act," Review of Financial Economics, John Wiley & Sons, vol. 8(2), pages 101-119, September.
    • Handle: RePEc:wly:revfec:v:8:y:1999:i:2:p:101-119
    DOI: 10.1016/S1058-3300(99)00010-5
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    Cited by:

    1. Thomas Luke Spreen & Ed Gerrish, 2022. "Taxes and tax‐exempt bonds: A literature review," Journal of Economic Surveys, Wiley Blackwell, vol. 36(4), pages 767-808, September.

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