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State-level Federal Stimulus Funds and Economic Growth: The American Recovery and Reinvestment Act

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  • Klaas Staal

    (Karlstad University)

Abstract

The American Recovery and Reinvestment Act encompassed a substantial federally-funded state-level fiscal stimulus. The objectives of the Act were to increase employment and stimulate economic growth. While the level of the fiscal stimulus was potentially endogenous, a direct analysis of its effects leads to biased results. To circumvent this, the effect of the stimulus on economic growth was studied using instrumental variable estimation, since the distribution of a large part of the funds was based on conditions exogenous to the economic downturn. A cross-state two-stage least squares estimation procedure was used to quantify the effect of the stimulus on economic growth and to show that the robust significant positive effect of the stimulus amounts to a fiscal multiplier of almost 1.6. The results further show that the positive effect of stimulus spending remained significant until the end of the first term of the Obama presidency.

Suggested Citation

  • Klaas Staal, 2020. "State-level Federal Stimulus Funds and Economic Growth: The American Recovery and Reinvestment Act," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 26(1), pages 33-43, February.
    • Handle: RePEc:kap:iaecre:v:26:y:2020:i:1:d:10.1007_s11294-020-09772-6
    DOI: 10.1007/s11294-020-09772-6
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    References listed on IDEAS

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    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
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    6. James Feyrer & Bruce Sacerdote, 2011. "Did the Stimulus Stimulate? Real Time Estimates of the Effects of the American Recovery and Reinvestment Act," NBER Working Papers 16759, National Bureau of Economic Research, Inc.
    7. Conley, Timothy G. & Dupor, Bill, 2013. "The American Recovery and Reinvestment Act: Solely a government jobs program?," Journal of Monetary Economics, Elsevier, vol. 60(5), pages 535-549.
    8. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-685, September.
    9. Jason Seligman, 2012. "Support of State and Local Finance under Persistent Federal Deficits," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 18(4), pages 383-395, November.
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    More about this item

    Keywords

    American recovery and reinvestment act; State fiscal relief; Endogeneity; Economic growth;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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