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Regional Consumption Responses and the Aggregate Fiscal Multiplier

Bill Dupor (), Marios Karabarbounis, Marianna Kudlyak and M. Saif Mehkari

No 2018-4, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We use regional variation in the American Recovery and Reinvestment Act (2009-2012) to analyze the effect of government spending on consumer spending. Our consumption data come from household-level retail purchases in Nielsen and auto purchases from Equifax credit balances. We estimate that a $1 increase in county-level government spending increases consumer spending by $0.18. We translate the regional consumption responses to an aggregate fiscal multiplier using a multi-region, New Keynesian model with heterogeneous agents and incomplete markets. Our model successfully generates the estimated positive local multiplier, a result that distinguishes our incomplete markets model from models with complete markets. The aggregate consumption multiplier is 0.4, which implies an output multiplier higher than one. The aggregate consumption multiplier is almost twice the local estimate because trade linkages propagate government spending across regions.

Keywords: Consumer Spending; Fiscal Multiplier; Regional Variation; Heterogeneous Agents (search for similar items in EconPapers)
JEL-codes: E21 E62 H31 H71 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
Date: 2018-03-16
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DOI: 10.20955/wp.2018.004

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