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The Local-Spillover Decomposition of an Aggregate Causal Effect

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Abstract

This article presents a method to decompose the causal effects of U.S. defense spending on income into a local effect and a spillover effect using panel data. We estimate positive local and spillover multipliers. By construction, the sum provides an estimate of the aggregate multiplier, which is slightly greater than one in our benchmark specification. Using disaggregate data improves precision relative to using aggregate data alone. More generally, we provide a template to conduct inference on local, spillover, and aggregate causal effects in a unified framework.

Suggested Citation

  • Timothy G. Conley & Bill Dupor & Mahdi Ebsim & Jingchao Li & Peter B. McCrory, 2026. "The Local-Spillover Decomposition of an Aggregate Causal Effect," Review, Federal Reserve Bank of St. Louis, June.
    • Handle: RePEc:fip:fedlrv:103392
    DOI: 10.20955/r.2026.06
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    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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