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 persistent. Partial equilibrium calculations show that aﬀected governments’ aggregate expenditures and employment levels in 2017 would have been 6% to 10% higher if bond insurance had remained available.
Bond Insurance and Public Sector Employment
WP 22-03 – This paper uses a unique data set of local governments’ bond issuance, expenditure, and employment to study the impact of the monoline insurance industry’s demise on local governments’ operations.