The real effects of municipal bond insurance market disruptions11This paper was previous circulated with the title “Bond Insurance and Public Sector Employment.” I thank Gary Gorton, Andrew Metrick, Heather Tookes, William English, Paul Goldsmith-Pinkham, Cameron LaPoint, William Goetzmann, Stefano Giglio, Kaushik Vasudevan, Thomas Bonczek, Chase Ross, and Sharon Ross for helpful conversations. I thank participants at various seminars and conferences for their questions and comments. I thank several anonymous referees for their critiques and suggestions. The views expressed in this paper are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Philadelphia, the Federal Reserve Board, or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. No statements here should be treated as legal or investment advice. Data from SDC Platinum and Thomson Reuters EIKON used in this paper are licensed through Yale University

This paper uses a unique data set of local governments' bond issuance, expenditure, and employment to study the impact that the monoline insurance industry's demise has on local governments' operations. To show causality, I use an instrumental variable approach that exploits persistent insurance relationships and the cross-sectional variation in insurers' exposure to high-quality residential mortgage-backed securities. Governments associated with ailing insurers issued less debt, cut expenditures, and hired fewer workers. These effects are concentrated among opaque governments and are persistent. Partial equilibrium calculations show that affected governments' aggregate expenditures and employment levels in 2017 would have been close to 10% higher if bond insurance had remained available.