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Prioritization in private-activity-bond volume cap allocation


  • Stephan Whitaker


This paper proposes and tests a structural model reflecting the process of authorizing private-activity municipal bond issuance. Private-activity municipal bonds offer tax-exempt financing for programs including industrial development, utilities, low-income housing, and student loans. The Federal tax code sets annual caps on the total tax-exempt issuance within each state, so authorization becomes a scarce resource distributed via a political process. Interviews with program administrators in several states suggested the authorization process involves prioritizing categories of use, authorizing bonds for high-priority uses first, and then authorizing bonds for lower-priority uses until the cap is exhausted. A model representing this process suggests variables to include in reduced-form estimations and an alternative interpretation of the coefficients. The fit of the model can be improved by adding measures of political influence and imposing a structure that reflects the political prioritization process. In general, industrial development and utilities appear to be the highest priority uses of private-activity municipal bonds. Mortgage revenue bonds are the residual category most frequently.

Suggested Citation

  • Stephan Whitaker, 2011. "Prioritization in private-activity-bond volume cap allocation," Working Paper 1110, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:1110

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    References listed on IDEAS

    1. Michael D. Bordo & Dominique Simard & Eugene White, 1994. "France and the Bretton Woods International Monetary System: 1960-1968," NBER Working Papers 4642, National Bureau of Economic Research, Inc.
    2. Michael Bordo & Ali Dib & Lawrence Schembri, 2010. "Canada's Pioneering Experience with a Flexible Exchange Rate in the 1950s: (Hard) Lessons Learned for Monetary Policy in a Small Open Economy," International Journal of Central Banking, International Journal of Central Banking, vol. 6(3), pages 51-99, September.
    3. Michael D. Bordo & Barry Eichengreen, 2008. "Bretton Woods and the Great Inflation," NBER Working Papers 14532, National Bureau of Economic Research, Inc.
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    Municipal bonds ; Tax exemption;

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