TY  - JOUR
AU  - Mankiw,N. Gregory
AU  - Poterba,James M.
TI  - Stock Market Yields and the Pricing of Municipal Bonds
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5607
PY  - 1996
Y2  - June 1996
UR  - http://www.nber.org/papers/w5607
L1  - http://www.nber.org/papers/w5607.pdf
N1  - Author contact info:
N. Gregory Mankiw
Department of Economics
Littauer 223
Harvard University
Cambridge, MA  02138
Tel: 617/495-4301
Fax: 617/495-7730
E-Mail: ngmankiw@fas.harvard.edu

James M. Poterba
Department of Economics
MIT, E52-350
50 Memorial Drive
Cambridge, MA  02142-1347
Tel: 617/253-6673
Fax: 617/258-7804
E-Mail: poterba@nber.org
AB  - This paper proposes an alternative to the traditional model for explaining the spread between taxable and tax-exempt bond yields. This alternative model is a special case of a general class of clientele models of portfolio choice and asset market equilibrium.  In particular, we consider a setting with two types of investors, a taxable investor and a tax-exempt investor, who hold specialized bond portfolios.  The tax-exempt investor holds only taxable bonds, and the taxable investor holds only tax-exempt bonds.  Both investors hold equity, and the taxable and tax-exempt bond markets are linked through the equilibrium conditions governing equity holding and bond holding for each type of investor.  In contrast to the traditional model, this alternative model has the potential to explain the small observed spread between taxable and tax-exempt yields.  In addition, this model predicts that the yield spread between taxable and tax-exempt bonds should be an increasing function of the dividend yield on corporate stocks.  Although the substantial changes in the tax code during the last four decades complicate the testing of this model, we find some support for the predicted relationship between the equity dividend yield and the yield spread between taxable and tax-exempt bonds.
ER  -