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The impact of bank financing on municipalities’ bond issuance and the real economy

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  • Dagostino, Ramona

Abstract

Do federal tax incentives for banks investing in municipal bonds support local governments during recessions? This paper exploits a change in tax benefits for banks purchasing municipal bonds and finds that expanding access to bank financing during recessions increases local governments’ debt issuance and employment growth. The estimated job multiplier is 22 jobs per million dollars of spending. There is moderate evidence of mortgage loans being crowded out by banks’ increased holdings of municipal bonds.

Suggested Citation

  • Dagostino, Ramona, 2025. "The impact of bank financing on municipalities’ bond issuance and the real economy," Journal of Financial Economics, Elsevier, vol. 166(C).
    • Handle: RePEc:eee:jfinec:v:166:y:2025:i:c:s0304405x25000303
    DOI: 10.1016/j.jfineco.2025.104022
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    More about this item

    Keywords

    Municipal bonds; Tax policy; Employment; Recession; Bank financing; Crowding out; Multiplier;
    All these keywords.

    JEL classification:

    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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