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Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions

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  • Emi Nakamura
  • Jón Steinsson

Abstract

We use rich historical data on military procurement spending across U.S. regions to estimate the effects of government spending in a monetary union. Aggregate military build-ups and draw-downs have differential effects across regions. We use this variation to estimate an "open economy relative multiplier" of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed economy aggregate multiplier. The closed economy aggregate multiplier is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind." In contrast, our open economy relative multiplier "differences out" these effects because different regions in the union share a common monetary and tax policy. Our estimates provide evidence in favor of models in which demand shocks can have large effects on output.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17391.

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Date of creation: Sep 2011
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Handle: RePEc:nbr:nberwo:17391

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  1. Fiscal Stimulus Works
    by Mark Thoma in Economist's View on 2011-10-02 16:45:00
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