Resource Windfalls, Public Expenditure and Local Economies

Antonella Bancalari and Juan Pablo Rud

No 21510, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Can local government spending spur economic activity? We exploit a reform in Peru that redistributed natural resource tax revenues to municipalities in non-extractive areas, generating exogenous variation in inter-governmental transfers. Between 2006 and 2018, we estimate a dynamic cumulative fiscal multiplier of around 1.3, going up to 1.6 in more closed, rural areas. We show that the resulting windfalls boosted public investment, as intended by the reform. Using micro-data, we find increases in labor force participation, wage earnings and revenues for household firms and farms, with the strongest effects in agriculture. Consistent with this, we show that rural areas benefited the most, experiencing rises in income and consumption, and declines in poverty.

Keywords: Peru (search for similar items in EconPapers)
JEL-codes: H23 H27 H30 J23 J24 (search for similar items in EconPapers)
Date: 2026-05
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