State and Local Financial Instruments
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State and Local Financial Instruments

Policy Changes and Management

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.
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Chapter 14: Conclusion

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


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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