The real effects of municipal bond insurance market disruptions

This paper uses a unique data set of local governments' bond issuance, expenditure, and employment to study the impact that the monoline in-surance industry's demise has on local governments' operations. To show causality, I use an instrumental variable approach that exploits persistent insurance relationships and the cross-sectional variation in insurers' exposure to high-quality residential mortgage-backed securities. Governments associated with ailing insurers issued less debt, cut expenditures, and hired fewer workers. These effects are concentrated among opaque gov-ernments and are persistent. Partial equilibrium calculations show that affected governments' aggregate expenditures and employment levels in 2017 would have been close to 10% higher if bond insurance had remained available.