The economic effects of public financing: Evidence from municipal bond ratings recalibration

Manuel Adelino, Igor Cunha, Miguel A. Ferreira

Research output: Contribution to journalArticlepeer-review

50 Scopus citations


We show that municipalities' financial constraints can have a significant impact on local employment and growth. We identify these effects by exploiting exogenous upgrades in U.S. municipal bond ratings caused by Moody's recalibration of its ratings scale in 2010. We find that local governments increase expenditures because their debt capacity expands following arating upgrade. These expenditures have an estimated local income multiplier of 1.9 and a cost per job of $20,000 per year. Our findings suggest that debt-financed increases in government spending can improve economic conditions during recessions.

Original languageEnglish
Pages (from-to)3223-3268
Number of pages46
JournalReview of Financial Studies
Issue number9
StatePublished - Sep 1 2017

Bibliographical note

Funding Information:
We thank Andrew Karolyi (the editor); two anonymous referees; Heitor Almeida, Jean-Noel Barrot, Daniel Bergstresser, Bernard Black, Dario Cestau, Gabriel Chodorow-Reich, Jess Cornaggia, Kimberly Cornaggia, Michael Faulkender, Fernando Ferreira, Tracy Gordon, Todd Gormley, John Griffin, Ryan Israelsen, William Mullins, Hoai-Luu Nguyen, Felipe Restrepo, and Ruy Ribeiro; participants at the American Finance Association Annual Meeting, Carnegie Mellon Conference on the Economics of Credit Rating Agencies, CEPR European Summer Symposium in Corporate Finance, European Finance Association Annual Meeting, SFS Cavalcade, Brandeis Municipal Finance Conference, and Lubrafin; and seminar participants at Cornell University, Federal Reserve Bank of Chicago, FGV–São Paulo School of Economics, Harvard Business School, Indiana University, Insper, London Business School, Maastricht University, Norwegian School of Economics, Nova School of Business and Economics, Texas A&M, Tilburg University, and University of Amsterdam for helpful comments. We gratefully acknowledge financial support from the European Research Council (ERC) and the Fundação para a Ciência e Tecnologia (FCT). Supplementary data can be found on The Review of Financial Studies web site. Send correspondence to Miguel Ferreira Nova School of Business and Economics, Campus de Campolide, 1099-032 Lisboa, Portugal; telephone: +351 213801631. E-mail:

Publisher Copyright:
© The Author 2017. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.

Copyright 2017 Elsevier B.V., All rights reserved.

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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