U.S. states are sovereign entities and can’t declare bankruptcy as cities and municipalities. This paper examines the impact of a switch in sovereign bankruptcy rules that allows declaring bankruptcy from an economics model perspective. Allowing bankruptcy increases ex-ante risks for the government to refuse repayment, but provides ex-post benefits of reducing default costs and saving federal bailouts. This paper provides a simple framework to analyze this tradeoff. Event analysis shows that an unexpected switch in bankruptcy rules that allows for bankruptcy would decrease government debt-to-GDP ratio by 9.2 percentage points, increase consumption by 0.69 percent, but increase spread by 1.1 percentage points.

Monetary policy in the USA affects borrowing costs for state and local governments, incentivizing municipal borrowing and spending, which in turn affects economic outcomes. Using municipal bond indices and transaction-level data, I find that responses to monetary policy are dampened relative to treasuries and heterogeneous across location and bond characteristics. In my baseline estimate, muni yields move 26 bp after a 100 bp monetary shock. To study implications for local fiscal policy, I model US localities as small open economies in a monetary union with independent fiscal agents. In a calibrated model, monetary transmission is significantly affected by municipal borrowing costs.

Widespread municipal defaults in the late 19th century prompted U.S. states to pass laws restricting the amount of debt cities could incur. These restrictions generally did not bind until the 1920s, when suburban growth spurred local governments to invest in infrastructure, most of which was financed by bonds. We study the relationship between several major debt restrictions – debt limits, supermajority voting referenda, and debt exceptions – and municipal indebtedness in the Roaring Twenties. We find that cities that faced more restrictive debt rules were less indebted by 1929. We also find that debt limits reduced the amount of capital spending in cities during the 1920s and 1930s, while stricter voting rules reduced the likelihood of municipal default in the 1930s. These rules thus determined not only the degree of debt accumulation in early 20th century cities, but also their infrastructure investment and financial health.

The part of the UK fiscal framework which determines how UK government funding is allocated across the four home nations has undergone profound change since 2012, given tax and social security devolution. The UK government’s post-Brexit plans for regional development funding, state aid, regulation and trade negotiations have led to significant disagreements about the nature of the devolved fiscal and constitutional settlement. And the COVID-19 pandemic provided a major shock to a fiscal system with limited flexibility for the Scottish, Welsh and Northern Irish devolved governments. This paper reviews the changes and challenges faced during these reforms and policy shocks. We find that: tensions about reforms to funding arrangements reflect the inconsistency of principles guiding the reforms; that the UK government’s post-Brexit plans do reduce the policy autonomy of the devolved governments, but reflect powers central governments often have in even highly decentralised countries; and that temporary changes to rules and the nature of the COVID-19 pandemic prevented a subnational fiscal crisis, but that more systematic change may make the system more robust to future shocks. This suggests that a review of the principles underpinning the UK’s subnational fiscal and economic policies would be highly worthwhile.