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State economic policy uncertainty and municipal bond pricing

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  • Abakah, Alex Annan

Abstract

This paper examines whether state-level economic policy uncertainty is priced in the municipal bond market. Using a comprehensive sample of new tax-exempt municipal bond issues matched with state economic policy uncertainty index, we document a positive and statistically significant relation between policy uncertainty and municipal bond yield spreads. Cross-sectional analyses reveal pronounced heterogeneity in the pricing of policy uncertainty. The effect is stronger for revenue bonds, state-issued bonds, and short-term bonds, and significantly attenuated for credit-enhanced bonds. We also show that elevated policy uncertainty reduces bond issuance activity, consistent with real-based delay in financing decisions. Overall, our results demonstrate that subnational economic policy uncertainty is a priced risk factor in the municipal bond market and highlight the importance of policy stability for public sector financing.

Suggested Citation

  • Abakah, Alex Annan, 2026. "State economic policy uncertainty and municipal bond pricing," Finance Research Letters, Elsevier, vol. 106(C).
    • Handle: RePEc:eee:finlet:v:106:y:2026:i:c:s1544612326008500
    DOI: 10.1016/j.frl.2026.110322
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    JEL classification:

    • Z12 - Other Special Topics - - Cultural Economics - - - Religion
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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