The Road of Federal Infrastructure Spending Passes Through the States

Sylvain Leduc and Daniel Wilson

No 2022-03, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Because federal infrastructure spending largely takes the form of grants to state governments, the macroeconomic impact of such packages depends on the share of federal grants that “passes through” to actual infrastructure spending done by states. A low degree of pass-through would tend to mute the economic impact from federal grants, reflecting a crowd-out effect on state spending. We first revisit Knight’s (2002) influential finding of near-zero pass-through (perfect crowd out) of federal highway grants. That result is found to be specification-sensitive and is reversed completely in a longer sample, with estimates implying dollar-for-dollar pass-through of grants to spending. We then extend the analysis to allow for dynamics. We find a contemporaneous pass-through effect of about 1 and a longer-run cumulative effect of around 1.3. In the parlance of public finance, the flypaper effect is strong.

Keywords: infrastructures; spending; states; fiscal policy; federal grants (search for similar items in EconPapers)
JEL-codes: E62 H54 H77 (search for similar items in EconPapers)
Pages: 22
Date: 2022-02-01
New Economics Papers: this item is included in nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.24148/wp2022-03

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