Economic policy uncertainty and municipal corporate bonds credit spreads: Evidence from China

This study investigates the influence of economic policy uncertainty on municipal corporate bonds credit spreads in China using data from 2010 to 2022. We find a significant negative nexus between changes in economic policy uncertainty and changes in credit spreads. This finding remains robust after addressing potential endogeneity issues. Mechanism analysis reveals that heightened economic policy uncertainty triggers a "flights to safety"phenomenon, leading to higher bond liquidity, which in turn results in lower financing costs and smaller credit spreads. This effect is more pronounced for municipal corporates with higher credit ratings and during periods following default events.