Local and Aggregate Fiscal Policy Multipliers

Bill Dupor and Guerrero Rodrigo

No 2016-4, Working Papers from Federal Reserve Bank of St. Louis

Abstract: In this paper, we estimate the effect of defense spending on the U.S. macroeconomy since World War II. First, we construct a new panel dataset of state-level federal defense contracts. Second, we sum observations across states and, using the resulting time series, estimate the aggregate effect of defense spending on national income and employment via instrumental variables. Third, we estimate local multipliers using the state-level data, which measures the relative effect on economic activity due to relative differences in defense spending across states. Comparing the aggregate and local multiplier estimates, we find that the two deliver similar results, providing a case in which local multiplier estimates may be reliable indicators of the aggregate effects of fiscal policy. We also estimate spillovers using interstate commodity flow data and find some evidence of small positive spillovers, which explain part of the (small) difference between the estimated local and aggregate multipliers. Across a wide range of specifications, we estimate income and employment multipliers between zero and 0.5. We reconcile this result with the greater-than-one multipliers found in Nakamura and Steinsson (2014) by analyzing the impact of the Korean War episode in the estimation.

Keywords: Fiscal policy; Fiscal multipliers; spillovers (search for similar items in EconPapers)
JEL-codes: E62 H30 H56 H57 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2016-03-29
New Economics Papers: this item is included in nep-mac and nep-ure
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Citations: View citations in EconPapers (26)

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Journal Article: Local and aggregate fiscal policy multipliers (2017)
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DOI: 10.20955/wp.2016.004

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