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Partisanship and Fiscal Policy in Economic Unions: Evidence from U.S. States

Gerald Carlino (), Thorsten Drautzburg, Robert P. Inman and Nicholas Zarra

No 20-20, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: In economic unions the fiscal authority consists not of one, but many governments. We analyze whether partisanship of state-level politicians affects federal policies, such as fiscal stimulus in the U.S. Using data from close elections, we find partisan differences in the marginal propensity to spend federal transfers: Republican governors spend less. This partisan difference has tended to increase with measures of polarization. We quantify the aggregate effects in a New Keynesian model of Republican and Democratic states in a monetary union: Lowering partisan differences to levels prevailing during less polarized times increases the transfer multiplier by 0.30. The observed changes in the share of Republican governors lead to variation in the multiplier of 0.20 in the model. Local projection methods support this prediction.

Keywords: intergovernmental transfers; monetary union; fiscal multiplier; partisanship; regression discontinuity.; flypaper effect (search for similar items in EconPapers)
JEL-codes: H72 H77 F45 E62 C24 (search for similar items in EconPapers)
Pages: 56
Date: 2020-06-01, Revised 2020-06-01
New Economics Papers: this item is included in nep-mac and nep-pol
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DOI: 10.21799/frbp.wp.2020.20

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