(Revised August 1, 2022)
Municipal (muni) bonds are an important source of funding for state and local governments. During the Covid-19 pandemic, muni debt markets became severely distressed. In response, the Federal Reserve established the Municipal Liquidity Facility (MLF). Meanwhile, Congress enacted extensive ﬁscal measures that included direct aid to cities and states. To understand whether and how these policies worked, we employ a state-level regression model to estimate the relative eﬃcacy of monetary and ﬁscal policy interventions for the term structure of muni-Treasury yield spreads. We ﬁnd that ﬁscal and monetary policy together reduced those spreads by as much as 225 basis points. Fiscal policy contributed at least twice as much as monetary policy to the notable decline in shorter-term muni-Treasury spreads. At longer maturities, the contribution of ﬁscal policy was at least three times as large as that of monetary policy, suggesting that it addressed fundamental credit concerns.