Association for Public Policy Analysis & Management

This paper examines the fiscal federalism of the sub­national public capital markets. Specifically, it compares the effect of federal fiscal policy on municipal bond interest rates to the potential effect of an emerging body of direct federal regulation of the municipal bond market. The results suggest fiscal policy remains an important factor in this market, but that the emerging regulatory role also has noteworthy implications for state and local borrowers. These findings update a rich literature on the relationship between tax policy and municipal bond yields, and they contribute to an emerging debate about the implications for federalism of the federal government's response to the recent financial crisis.