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The municipal government channel of monetary policy

Published online by Cambridge University Press:  23 September 2024

Matthew Wilson Open the ORCID record for Matthew Wilson [Opens in a new window]
Matthew Wilson*
Affiliation:
U.S. Congressional Budget Office, Washington, D.C., USA
*
Email: matthew.wilson@cbo.gov
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Abstract

Monetary policy in the USA affects borrowing costs for state and local governments, incentivizing municipal borrowing and spending, which in turn affects economic outcomes. Using municipal bond indices and transaction-level data, I find that responses to monetary policy are dampened relative to treasuries and heterogeneous across location and bond characteristics. In my baseline estimate, muni yields move 26 bp after a 100 bp monetary shock. To study implications for local fiscal policy, I model US localities as small open economies in a monetary union with independent fiscal agents. In a calibrated model, monetary transmission is significantly affected by municipal borrowing costs.

Keywords

Monetary policystate and local governmentsmunicipal bondssmall open economiesfiscal policyE52E62E63F41F45G12H72H74

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Articles
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Macroeconomic Dynamics , Volume 29 , 2025 , e29
Copyright
© The Author(s), 2024. Published by Cambridge University Press

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