The Relationship between Government Financial Condition and Expected Tax Rates Reflected in Municipal Bond Yields

37 Pages Posted: 22 Jun 2007

Multiple version iconThere are 2 versions of this paper

Date Written: November 1995

Abstract

Yields on long-term municipal bonds reflect both current and expected future tax rates. This paper derives expected changes in tax rates from yields on short- and long-term municipal bonds and examines the relationship between expected changes in tax rates and the financial condition of the federal government between 1965 and 1994. The main empirical result is that a positive relationship exists between the expected tax rate and federal debt. Inflation also positively affects the expected tax rate, suggesting that investors may expect tight fiscal policies when inflation is high. Qualitative results are similar across specifications, estimators, and sample periods.

Keywords: tax rate, federal debt, municipal bonds, inflation

JEL Classification: E60, H20

Suggested Citation

Park, Sangkyun, The Relationship between Government Financial Condition and Expected Tax Rates Reflected in Municipal Bond Yields (November 1995). FRB of New York Staff Report No. 7, Available at SSRN: https://ssrn.com/abstract=993920 or http://dx.doi.org/10.2139/ssrn.993920

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