Monetary policy, differences among issuing agencies, and the pricing of local government bonds

Abstract

ABSTRACT Based on a sample of local government bonds from 2015 to 2018, this paper examines the impact of monetary policy on the pricing of local government bonds. Furthermore, this paper explores how the differences among issuing agencies affect this relationship. The empirical results show that loose monetary policy can reduce the spread of local government bonds. The degree of fiscal decentralisation and the governance ability of the government could moderate the impact of monetary policy on the spread of local government bond issuance, the debt risk of local government might increase the impact of monetary policy on the spread of local government bond issuance. In addition, tests on the intermediary mechanism by which monetary policy affects local government bond pricing show that loose monetary policy can reduce the spread of local government bond issuance by increasing the supply of market capital and improving the financial status of local governments.