The supply elasticity of municipal debt evidence from bank-qualified bonds Travis St. Clair
By: St. Clair, Travis
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Material type: 
ArticleSubject(s): DEUDA PUBLICA LOCAL | BONOS MUNICIPALES | ELASTICIDAD | EXENCIONES TRIBUTARIAS | INFRAESTRUCTURAS | FINANCIACION | ESTADOS UNIDOS
In:
National Tax Journal v. 77, n. 1, March 2024, p. 111-139Summary: This paper provides estimates of the supply elasticity of municipal debt by exploiting a discrete jump in interest rates created by the Tax Reform Act of 1986. To qualify for bank financing of tax-exempt debt, governments can issue no more than $10 million of nominal debt per year. Using bunching methods, I quantify the intensive margin responses to the notch for local governments. The estimates indicate that the average government lowers its borrowing by approximately 5 percent in response to an 8–17 percent increase in interest costs, implying an overall price elasticity of −0.3 to −0.6.
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This paper provides estimates of the supply elasticity of municipal debt by exploiting a discrete jump in interest rates created by the Tax Reform Act of 1986. To qualify for bank financing of tax-exempt debt, governments can issue no more than $10 million of nominal debt per year. Using bunching methods, I quantify the intensive margin responses to the notch for local governments. The estimates indicate that the average government lowers its borrowing by approximately 5 percent in response to an 8–17 percent increase in interest costs, implying an overall price elasticity of −0.3 to −0.6.
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