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Trade liberalization and municipal financing costs

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  • Liu, Chunbo
  • Xu, Liang
  • Yang, Liuming
  • Zhou, Yang

Abstract

This study examines the effects of trade liberalization on municipal financing costs. Using the granting of permanent normal trade relations (PNTR) to China as an exogenous shock, we find that U.S. counties that are more exposed to trade liberalization issue bonds with significantly higher tax-adjusted yield spreads. Moreover, these counties pay higher gross spreads and are less likely to issue bonds after PNTR. We also show that secondary market yield spreads increase significantly in response to the U.S. granting of PNTR to China. In addition, we provide evidence that a reduction in debt serving capacity serves as a channel underlying the trade shock effects. Our findings highlight the costs of trade liberalization for public finance.

Suggested Citation

  • Liu, Chunbo & Xu, Liang & Yang, Liuming & Zhou, Yang, 2025. "Trade liberalization and municipal financing costs," Journal of Banking & Finance, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:jbfina:v:178:y:2025:i:c:s037842662500144x
    DOI: 10.1016/j.jbankfin.2025.107524
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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