The municipal bond valuation puzzle : evidence from U.S. States
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1251804610-MIT.pdf
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198.69 KB
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Adobe PDF
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0a80d09c68f92e4f087e9b6a1e82771c
Author(s)
Scott, Justin Rand.
Advisor(s)
Daniel Greenwald.
Date Issued
2021
Publisher
Massachusetts Institute of Technology
Abstract
This paper seeks to elucidate the mechanisms that generate Jiang et al. (2020)'s "government debt valuation puzzle" by adapting their approach to the setting of state-level municipal debt. The main motivation in doing so is that states do not issue their own currencies, and are therefore precluded from monetizing the value of their debt through inflation. I find that, contrary to Jiang et al. (2020), the market value of out- standing state-level government debt is typically smaller than the present discounted value of current and future primary surpluses. For example, the gap between these two quantities is equal to 86.61 percent of GDP for the state of California from 1979 to 2019. This gap may be attributed to a number of factors: (i) expectations of federal bailouts and transfers during recessionary periods; (ii) balanced-budget amendments (BBAs) and statutory debt limits that constrain countercyclical fiscal spending; and (iii) mismeasurement of surpluses due to the omission of state-contingent liabilities for underfunded pensions and insolvent local governments.
Description
Thesis: S.M. in Management Research, Massachusetts Institute of Technology, Sloan School of Management, February, 2021
Cataloged from the official PDF version of thesis.
Includes bibliographical references (page 20).
Subjects
Sloan School of Management.
MIT Department
Sloan School of Management
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MIT theses may be protected by copyright. Please reuse MIT thesis content according to the MIT Libraries Permissions Policy, which is available through the URL provided.
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