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Financial markets, fiscal constraints, and municipal debt: lessons and evidence from the panic of 1873

Published online by Cambridge University Press:  20 August 2013

JOHN A. DOVE
JOHN A. DOVE*
Affiliation:
Manuel H. Johnson Center for Political Economy, 137N Bibb Graves Hall, Troy University, Troy, AL 36082, USA
*
*Email: JADove@troy.edu
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Abstract:

The current paper explores the municipal debt crisis that resulted from the panic of 1873, which caused a significant number of local governments in the United States to default on their debt obligations. The aftermath of that episode was one of constitutional change meant to constrain municipal governments from pursuing similar activities in the future. This paper empirically investigates the impact that these restrictions had on municipal borrowing costs, analyzed from bond yield data taken from several major US financial markets, so as to evaluate how binding and significant markets actually perceived these constraints to be. Overall, the results suggest that borrowing costs were lower for municipal governments that faced more stringent creditor guarantees regarding the issuing and repayment of debt, hard budget constraints, and also strict debt limits, while tax limits generally increased borrowing costs. These results not only conform too much of the current literature regarding the political economy of institutional constraints on public finance, they also add several important insights, especially when comparing defaulting to non-defaulting municipalities.

Type
Research Article
Information
Journal of Institutional Economics , Volume 10 , Issue 1 , March 2014 , pp. 71 - 106
Copyright
Copyright © Millennium Economics Ltd 2013 

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