The Multiplier Effect of Education Expenditure

Maarten De Ridder, Simona Hannon and Damjan Pfajfar

No 2020-058, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper examines the short-run effects of federal education expenditures on local income. We exploit city-level variation in exposure to national changes in the $30-billion Federal Pell Grant Program, which is the largest program to help low-income students attend college in the U.S., to calculate fiscal multipliers of education expenditures. An increase in Pell grants by 1 percent of a city's income raises local income by 2.4 percent over the next two years. This multiplier effect is larger than estimates for military spending (1.5 on average). Multipliers are higher when grants are awarded to students at non-profit colleges, as for-profit colleges absorb most of the grant increases with raises in tuition. Multipliers are also higher during recessions than in expansions: Pell grants can be an effective tool for countercyclical policy that adds to already established benefits, such as, increasing the affordability of college and fostering long-run economic growth.

Keywords: Fiscal expenditure; Pell grants; Education policy; Fiscal multipliers (search for similar items in EconPapers)
JEL-codes: H52 H62 (search for similar items in EconPapers)
Pages: 39
Date: 2020-08-07
New Economics Papers: this item is included in nep-edu, nep-pbe and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-58

DOI: 10.17016/FEDS.2020.058

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