A Brief Empirical Note on the Impact of Budget Deficits on the Real Municipal Bond Rate

Abstract

This article empirically investigates the impact of the federal budget deficit on the real interest-rate yield on high-grade, long-term municipal bonds. The model uses quarterly data and covers the period 1971:4 through 1985:4. Estimating in first-difference form by instrumental variables, it is found that the federal budget deficit does, in fact, elevate the real municipal bond rate. This finding implies at least some degree of crowding out of the state and local government sectors.