The relationship between local government economic freedom and bond ratings

With a newly developed measure of economic freedom across US local government jurisdictions, this paper aims to estimate the relationship between economic freedom and bond ratings.

The author uses a battery of cross-sectional econometric models to identify the impact that economic freedom might have on bond ratings using a sample of US municipal governments.

Overall, the results indicate that relatively more economic freedom within a local jurisdiction is associated with higher bond ratings and thus lower borrowing costs. However, similar to Roychoundhury and Lawson (2010), no specific subcomponent seems to affect bond ratings.

To the author’s knowledge this is the first scholarly work to address this topic at the local level.