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Aging and public financing costs: Evidence from U.S. municipal bond markets

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  • Butler, Alexander W.
  • Yi, Hanyi

Abstract

We examine the impact of population aging on municipal access to credit. A one standard deviation increase in a state’s population age leads to a 23 basis point increase in municipal bond issue spread. Three mechanisms drive this effect: income tax revenue, healthcare spending, and pension liabilities. Constitutional pension protections and securities with lower credit quality or longer maturity exacerbate the effect. To control for endogenous migration and mortality patterns, we exploit variation from historical state fertility trends. Our findings highlight the challenges municipalities face to cope with systemic demographic transition.

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  • Butler, Alexander W. & Yi, Hanyi, 2022. "Aging and public financing costs: Evidence from U.S. municipal bond markets," Journal of Public Economics, Elsevier, vol. 211(C).
    • Handle: RePEc:eee:pubeco:v:211:y:2022:i:c:s0047272722000676
    DOI: 10.1016/j.jpubeco.2022.104665
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    Cited by:

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    2. Minjie Deng and Chang Liu, 2024. "Public Financing Under Balanced Budget Rules," Discussion Papers dp24-04, Department of Economics, Simon Fraser University.
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    More about this item

    Keywords

    Local Public Finance; Municipal Bonds; Demographics; Aging;
    All these keywords.

    JEL classification:

    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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