TY  - JOUR
AU  - Metcalf,Gilbert E.
TI  - Arbitrage and the Savings Behavior of State Governments
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3017
PY  - 1991
Y2  - August 1991
UR  - http://www.nber.org/papers/w3017
L1  - http://www.nber.org/papers/w3017.pdf
N1  - Author contact info:
Gilbert E. Metcalf
Room 3221
Department of the Treasury
Washington, DC 20220
1500 Pennsylvania Ave., NW
Tel: 202-622-0173
E-Mail: gilbert.metcalf@tufts.edu
M2  - featured in NBER digest on 1989-11-01
AB  - The federal tax code creates strong incentives for tax arbitrage activity on the part of state governments. This arbitrage activity is illegal and previous research has typically assumed that the constraint against arbitrage activity is binding. This paper explicitly tests this proposition by considering whether financial asset holdings increase as the yield spread between taxable and tax exempt securities rises. Using a data set on 40 state governments over a 7 year period, I find that there is a significant response to changes in the yield spread. One implication of these results is that the Tax Reform Act of 1986 which made even greater efforts to curb arbitrage activity is likely to be ineffective. 
ER  -