The Tax Act of 1986 changed the tax treatment of tax-exempt municipal bonds for banks. Since banks were the dominant participant in the municipal bond market until 1986, some believe that this resulted in the breakdown of the long-run equilibrium relationship between municipal and U.S. treasury...

Recent studies of the Fisher relation have yielded contradictory conclusions on the importance of taxes in determining the long-run response of nominal interest rates to changes in expected inflation. This study uses data on taxable U.S. treasury and tax exempt municipal bond interest rates to...