Beschreibung:
Monetary policy in the U.S. 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, risk, and liquidity. In my baseline estimate, muni yields move 22bp after a 100bp monetary shock. To study implications for local fiscal policy, I model U.S. 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