The Municipal Government Channel of Monetary Policy
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