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Are there Spillover Effects From Munis?

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Author Info

  • Bertrand Candelon
  • Rabah Arezki
  • Amadou N. R. Sy

Abstract

This paper studies the spillover effects both within the bond markets for individual U.S. states and between the latter and the market for U.S. Treasury securities. We perform the Forbes and Rigobon (2002) spillover test using daily bond yield data over the period 2005 to 2011. Results are twofold. First, we find that between most markets for individual U.S. state bonds there are negative spillovers. In other words, an increase in borrowing costs in one U.S. state results in better borrowing conditions for other states. Second, we find no substantial spillover effect between shocks originating from state securities and from federal markets, except for a few large issuers. Using causality tests in the frequency domain, we find that the Treasury bond market directly causes changes in the markets for municipal bonds in both the short and long run. There is also some evidence of causality from the municipal to the Treasury bond market, but only of a long-run nature. Our results shed some light on the policy debate on the nature of spillover effects within fiscal unions.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/290.

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Length: 19
Date of creation: 01 Dec 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/290

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Keywords: Bonds; Fiscal analysis; Risk management; Spillovers; bond; bond yields; municipal bond yields; bond market; municipal bond; municipal bonds; treasury bond; bond markets; treasury securities; state bond; state bonds; treasury bond yields; bond funds; municipal bond market; financial markets; government securities; municipal bond markets; bond yield; capital inflows; private capital flows; bond issuers; national bond; credit rating; stock market; financial market; money market funds; bond issuer; national bond markets; capital flows; obligation bonds; debt securities; private capital; sub-national bond; financial contagion; markets for bonds; bond securities; yields on bonds; national bond market; stock markets; money market; bond investors; sub-national bond markets; general obligation bonds;

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References

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  1. Andrew Ang & Francis A. Longstaff, 2011. "Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe," NBER Working Papers 16982, National Bureau of Economic Research, Inc.
  2. Ilan Goldfajn & Taimur Baig, 1999. "Financial market contagion in the Asian crisis," Textos para discussão 400, Department of Economics PUC-Rio (Brazil).
  3. Mardi Dungey & Renee Fry & Vance Martin & Brenda González-Hermosillo, 2004. "Empirical Modeling of Contagion," IMF Working Papers 04/78, International Monetary Fund.
  4. Breitung, Jorg & Candelon, Bertrand, 2006. "Testing for short- and long-run causality: A frequency-domain approach," Journal of Econometrics, Elsevier, vol. 132(2), pages 363-378, June.
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Cited by:
  1. C. Randall Henning & Martin Kessler, 2012. "Fiscal Federalism: US History for Architects of Europe's Fiscal Union," Working Paper Series WP12-1, Peterson Institute for International Economics.
  2. Heinz Handler, 2013. "The Eurozone: Piecemeal Approach to an Optimum Currency Area," WIFO Working Papers 446, WIFO.

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