Fiscal transparency or fiscal illusion? Housing and credit market responses to fiscal monitoring

Abstract

Nongovernmental stakeholders, including taxpayers and investors of government bonds, have an interest in government financial information. Fiscal transparency entails both access to and understandability of government information. Analyses of a government borrower’s financial information, often facilitated by market intermediaries, directly affect investor return on the bond market. In contrast, taxpayers may lack the incentive or capacity to comprehend government financial data prepared based on complex accounting rules. State fiscal monitoring programs compile and analyze local government financial data to track fiscal stress. This paper examines how housing and municipal bond markets respond to the New York monitoring program implemented in 2013, which uses existing, account-level local government financial data to assign simple labels signifying local government insolvency. Housing prices decreased following significant fiscal stress designations, but not statistically significantly following the other more modest stress labels. In contrast, the bond market priced in government financial information even before the state monitoring.