Policy Changes and Management
This book has used the theories and methodologies that are a part of the second-generation theory of fiscal federalism described by Oates (2005). We have used financial economics, information economics, public choice and principal–agent theories to analyze how the municipal market operates, how the market should operate, the role and practice of financial intermediaries, and the appropriate level and type of state–local, and federal regulation. This book is written to systematically answer the question posed at the beginning of Chapter 1: Why is understanding the financial instruments sold by state and local governments in the United States of America important? Part I provided an overview of the various aspects that make the municipal securities market ‘special’. It also placed the municipal market in the greater constitutional, judicial and legislative context of fiscal federalism. We analyzed the tax status of municipal securities as a driving force behind the federal government’s approach to the market, and the primary factor behind the tension between the national and subnational governments over the debt financing affairs of state and local governments in the United States. The federal tax exemption of municipal debt is fundamentally important to the USA’s fiscal federalist framework, yet coupled with fiscal sovereignty, results in a segmented market with sufficient, but limited demand for municipal securities.
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