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Fiscal Stimulus in Economic Unions: What Role for States?

In: Tax Policy and the Economy, Volume 30

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  • Gerald Carlino
  • Robert P. Inman

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.
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Suggested Citation

  • Gerald Carlino & Robert P. Inman, 2014. "Fiscal Stimulus in Economic Unions: What Role for States?," NBER Chapters,in: Tax Policy and the Economy, Volume 30 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:13687
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    Cited by:

    1. Foremny, Dirk & Solé-Ollé, Albert, 2016. "Who's coming to the rescue? Revenue-sharing slumps and implicit bailouts during the Great Recession," ZEW Discussion Papers 16-049, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. repec:kap:iaecre:v:23:y:2017:i:4:d:10.1007_s11294-017-9655-7 is not listed on IDEAS

    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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