State and Local Financial Instruments

State and Local Financial Instruments

Policy Changes and Management

Studies in Fiscal Federalism and State–local Finance series

Craig L. Johnson, Martin J. Luby and Tima T. Moldogaziev

The ability of a nation to finance its basic infrastructure is essential to its economic well-being in the 21st century. This book covers the municipal securities market in the United States from the perspective of its primary capital financing role in a fiscal federalist system, where subnational governments are responsible for financing the nation’s essential physical infrastructure.

Chapter 4: The federalist framework: fiscal sovereignty, federal regulation and disclosure

Craig L. Johnson, Martin J. Luby and Tima T. Moldogaziev

Subjects: economics and finance, public finance, politics and public policy, public administration and management, public policy


In this chapter we review how the fiscal federalist structure has affected the way the municipal securities market regulatory framework has developed. The US federalist system provides a legal framework resulting in a complex, disjointed regulatory web across multiple levels of government. The regulatory structure amplifies the diversity and complexity of the marketplace. The federal government exercises overall responsibility for US financial markets, and over the twentieth and into the twenty-first century has expanded its direct regulatory control over most financial markets, except for the direct control of municipal issuers. Traditionally the federal government’s involvement was mostly intended to limit their exposure to tax expenditures resulting from the tax exemption of municipal securities, but now the federal government does have extensive involvement in the municipal market. We cover this growing involvement with our discussion of Dodd–Frank, and continuing disclosure and post-issuance requirements. The fiscal federalist structure provides the basis and the scope of the regulatory framework for municipal debt. Before the 1960s the municipal securities market was mostly free from federal regulation (Temel, 2001).

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