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The Long-Run Linkage Between Yields on Treasury and Municipal Bonds and the 1986 Tax Act

Listed author(s):
  • William J. Crowder

    (University of Texas at Arlington)

  • Mark E. Wohar

    (University of Nebraska at Omaha)

The Tax Act of 1986 changed the tax treatment of tax-exempt municipal bonds for banks. Since banks were the dominant participant in the municipal bond market until 1986, some believe that this resulted in the breakdown of the long-run equilibrium relationship between municipal and U.S. treasury securities of equal maturity. We present evidence that there was a significant break in the relationship around the time of the Tax Act and that once this break is accounted for, the relationship between municipal and treasury yields remains intact.

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Paper provided by EconWPA in its series Finance with number 9702005.

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Length: 26 pages
Date of creation: 25 Feb 1997
Handle: RePEc:wpa:wuwpfi:9702005
Note: Type of Document - Postscript; prepared on IBM PC ; to print on PostScript; pages: 26; figures: included
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