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Have U.S. Budget Deficits Raised the Real Interest Rate Yield on Tax-Free Municipal Bonds?

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  • Cebula, Richard

Abstract

Using a half century of data, this empirical study adopts a simple loanable funds to investigate the impact of the budget deficits on the ex post real interest rate yield on high grade municipal bonds in the U.S. Autoregressive 2SLS estimates for the 1960-2012 study period find that the ex post real interest rate yield on high grade municipal bonds is an increasing function of the ex post real interest rate yield on Moody’s Baa-rated corporate bonds, the ex post real interest rate yield on three-year U.S. Treasury notes, the real value of the S&P 500 stock index, and the federal budget deficit (relative to the GDP level). Based on these results, it is observed that factors elevating the federal budget deficit appear to raise the real cost of borrowing to the cities (of all sizes), counties, and states across the U.S. Over the long run, failure to address the federal budget issue could have profound negative impacts on the finances of U.S. cities, counties, and states and their economic activities.

Suggested Citation

  • Cebula, Richard, 2014. "Have U.S. Budget Deficits Raised the Real Interest Rate Yield on Tax-Free Municipal Bonds?," MPRA Paper 55545, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:55545
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    References listed on IDEAS

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    1. Richard J. Cebula, 2013. "An exploratory inquiry into the impact of budget deficits on the nominal interest rate yield on Moody's Aaa-rated corporate bonds, 1973--2012," Applied Economics Letters, Taylor & Francis Journals, vol. 20(16), pages 1497-1500, November.
    2. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
    3. Richard J. Cebula, 2004. "Income Tax Evasion Revisited: The Impact of Interest Rate Yields on Tax-Free Municipal Bonds," Southern Economic Journal, John Wiley & Sons, vol. 71(2), pages 418-423, October.
    4. Cebula, Richard, 1996. "An Empirical Analysis of the Impact of Government Tax and Auditing Policies on the Size of the Underground Economy: The Case of the United States, 1973-94," MPRA Paper 49810, University Library of Munich, Germany.
    5. Bradley Ewing & Mark Yanochik, 1999. "Budget deficits and the term structure of interest rates in Italy," Applied Economics Letters, Taylor & Francis Journals, vol. 6(3), pages 199-201.
    6. Richard Cebula & Pablo Cuellar, 2010. "Recent evidence on the impact of government budget deficits on the ex ante real interest rate yield on Moody’s Baa-rated corporate bonds," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 34(3), pages 301-307, July.
    7. Cebula, Richard, 1996. "An Empirical Note on the Impact of the Federal Budget Deficit on Ex Ante Real Long-Term, Interest Rates, 1973-1995," MPRA Paper 51414, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    budget deficits; real interest rate; tax-free municipal bonds;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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