Working Paper

Bond Insurance and Public Sector Employment

Abstract: This paper uses a unique data set of local governments’ bond issuance, expenditure, and employment to study the impact of the monoline insurance industry’s demise on local governments’ operations. To show causality, I use an instrumental variable approach that exploits persistent insurance relationships and the cross-sectional variation in insurers’ exposure to high-quality residential mortgage-backed securities. Governments associated with ailing insurers issued less debt, cut expenditures, and hired fewer workers. These effects are persistent. Partial equilibrium calculations show that affected governments’ aggregate expenditures and employment levels in 2017 would have been 6% to 10% higher if bond insurance had remained available

Keywords: Bond insurance; municipal bonds; real effects; financial crisis;

JEL Classification: E60; G00; G01; G22; H40; H70; J00;

https://doi.org/10.21799/frbp.wp.2022.03

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2022-02-07

Number: 22-03