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An exploratory analysis of the impact of budget deficits and other factors on the ex post real interest rate yield on tax-free municipal bonds in the United States

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  • Richard J. Cebula

Abstract

Using over a half century of data, this empirical study adopts a simple loanable funds to investigate the impact of the federal budget deficits and other factors, chiefly financial market factors, on the ex post real interest rate yield on high-grade municipal bonds in the United States. Two autoregressive two-stage least squares (AR/2SLS) estimates for the 1960 to 2011 study period and another for the 1971 to 2011 study period find that the ex post real interest rate yield on high-grade municipal bonds is an increasing function of the ex post real interest rate yield on Moody's Baa-rated corporate bonds, the ex post real interest rate yield on 3-year US Treasury notes, the real value S&P 500 stock index and the federal budget deficit (relative to the GDP level). Based on these results, it is observed that factors elevating the federal budget deficit appear to raise the real cost of borrowing to the cities (of all sizes), counties and states across the United States. Given the time period studied, 1960 through 2011, this relationship appears to be an enduring one, one that responsible policy-makers should not overlook. Over the long run, failure to address the federal budget issue could have profound negative impacts on the finances of US cities, counties and states and their economic activities.

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  • Richard J. Cebula, 2014. "An exploratory analysis of the impact of budget deficits and other factors on the ex post real interest rate yield on tax-free municipal bonds in the United States," Applied Financial Economics, Taylor & Francis Journals, vol. 24(19), pages 1297-1302, October.
    • Handle: RePEc:taf:apfiec:v:24:y:2014:i:19:p:1297-1302
    DOI: 10.1080/09603107.2014.925057
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    References listed on IDEAS

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    1. Richard J. Cebula, 1998. "An empirical analysis of the impact of federal budget deficits on long‐term nominal interest rate yields, 1973.2–1995.4, using alternative expected inflation measures," Review of Financial Economics, John Wiley & Sons, vol. 7(1), pages 55-64.
    2. Bharat R. Kolluri & Rao N. Singamesetti & P. A. V. B. Swamy, 1988. "What do regressions of interest rates on deficits imply?," Finance and Economics Discussion Series 3, Board of Governors of the Federal Reserve System (U.S.).
    3. Whitney Newey & Kenneth West, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    4. Richard J. Cebula, 2013. "An exploratory inquiry into the impact of budget deficits on the nominal interest rate yield on Moody's Aaa-rated corporate bonds, 1973--2012," Applied Economics Letters, Taylor & Francis Journals, vol. 20(16), pages 1497-1500, November.
    5. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
    6. Bradley Ewing & Mark Yanochik, 1999. "Budget deficits and the term structure of interest rates in Italy," Applied Economics Letters, Taylor & Francis Journals, vol. 6(3), pages 199-201.
    7. Vito Tanzi, 1985. "Fiscal Deficits and Interest Rates in the United States: An Empirical Analysis, 1960-84 (Déficits budgétaires et taux d'intérêt aux Etats-Unis: analyse empirique, 1960-84) (El déficit fiscal y la," IMF Staff Papers, Palgrave Macmillan, vol. 32(4), pages 551-576, December.
    8. Cebula, Richard, 1996. "An Empirical Note on the Impact of the Federal Budget Deficit on Ex Ante Real Long-Term, Interest Rates, 1973-1995," MPRA Paper 51414, University Library of Munich, Germany.
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    1. Richard J. Cebula, 2020. "The community reinvestment act and real municipal bond interest rate yields in the united states: evidence from the municipal bond market," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 40(1), pages 3-12, April.
    2. Cebula, Richard J., 2018. "An Empirical Note on Income Tax Evasion Behavior and the Real Interest Rate Yield on Municipal Bonds," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 48(2), January.

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