ABSTRACT
This chapter provides a broad overview of economic and public policy issues arising from the use of tax-exempt debt to finance activities of state and local ("municipal") governments. It explains changes in the structure of the municipal bond market in recent years. The chapter examines the effects of tax policy on municipal bond yields. It focuses on the problems created by tax exemption as well as on proposed reforms of the market for municipal bonds. The chapter then examines the connection between the market for municipal bonds and the volume of municipal capital investment and analyzes the extent to which tax exemption alters the economy-wide allocation of resources. Municipal bonds differ from corporate, US Treasury, and other taxable bonds in ways other than tax exemption. Perhaps the most prominent is the serial form of municipal bond issues, which affects both the liquidity and trading costs of municipal bonds.
