Fiscal stimulus in economic unions: what role for states?

Gerald Carlino and Robert P. Inman

No 15-41, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy, and particularly the importance of state and local governments, to the center stage of macroeconomic policymaking. This paper addresses three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? An analysis of U.S. state fiscal policies show state deficits (in particular from tax cuts) can stimulate state economies in the short run but that there are significant job spillovers to neighboring states. Central government fiscal policies can best internalize these spillovers. Second, what central government fiscal policies are most effective for stimulating income and job growth? A structural vector autoregression analysis for the U.S. aggregate economy from 1960 to 2010 shows that federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower income assistance are both effective, with one- and two-year multipliers greater than 2.0. Third, how are states, as politically independent agents, motivated to provide increased transfers to lower income households? The answer is matching (price subsidy) assistance for such spending. The intergovernmental aid is spent immediately by the states and supports assistance to those most likely to spend new transfers.

Keywords: Fiscal federalism; Intergovernmental aid; Aggregate Stabilization policy; Multiplier analysis (search for similar items in EconPapers)
JEL-codes: E6 H3 H7 R5 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2015-11-16
New Economics Papers: this item is included in nep-mac and nep-pbe
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Fiscal Stimulus in Economic Unions: What Role for States? (2016)
Working Paper: Fiscal Stimulus in Economic Unions: What Role for States? (2015)
Chapter: Fiscal Stimulus in Economic Unions: What Role for States? (2014)
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