The Local-Spillover Decomposition of an Aggregate Causal Effect

Timothy Conley, Bill Dupor, Mahdi Ebsim, Jingchao Li and Peter McCrory

No 2021-006, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper presents a method to decompose the causal effect of government defense spending into: (i) a local (or direct) effect, and (ii) a spillover (or indirect) effect. Each effect is measured as a multiplier: the unit change in output of a one unit change in government spending. We apply this method to study the effect of U.S. defense spending on output using regional panel data. We estimate a positive local multiplier and a negative spillover multiplier. By construction, the sum of the local and spillover multipliers provides an estimate of the aggregate multiplier. The aggregate multiplier is close to zero and precisely estimated. We show that enlisting disaggregate data improves the precision of aggregate effect estimates, relative to using aggregate time series alone. Our paper provides a template for researchers to conduct inference about local, spillover and aggregate causal effects in a unified framework.

Keywords: local and spillover effects; aggregate fiscal multipliers (search for similar items in EconPapers)
JEL-codes: C3 E6 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2021-05-12
New Economics Papers: this item is included in nep-mac
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DOI: 10.20955/wp.2021.006

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