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Local and Aggregate Fiscal Policy Multipliers

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  • Dupor, William D.

    () (Federal Reserve Bank of St. Louis)

  • Rodrigo, Guerrero

    (Federal Reserve Bank of St. Louis)

Abstract

In this paper, we estimate the effect of defense spending on the U.S. macroeconomy since World War II. First, we construct a new panel dataset of state-level federal defense contracts. Second, we sum observations across states and, using the resulting time series, estimate the aggregate effect of defense spending on national income and employment via instrumental variables. Third, we estimate local multipliers using the state-level data, which measures the relative effect on economic activity due to relative differences in defense spending across states. Comparing the aggregate and local multiplier estimates, we find that the two deliver similar results, providing a case in which local multiplier estimates may be reliable indicators of the aggregate effects of fiscal policy. We also estimate spillovers using interstate commodity flow data and find some evidence of small positive spillovers, which explain part of the (small) difference between the estimated local and aggregate multipliers. Across a wide range of specifications, we estimate income and employment multipliers between zero and 0.5. We reconcile this result with the greater-than-one multipliers found in Nakamura and Steinsson (2014) by analyzing the impact of the Korean War episode in the estimation.

Suggested Citation

  • Dupor, William D. & Rodrigo, Guerrero, 2016. "Local and Aggregate Fiscal Policy Multipliers," Working Papers 2016-4, Federal Reserve Bank of St. Louis, revised 02 Jun 2017.
  • Handle: RePEc:fip:fedlwp:2016-004
    DOI: 10.20955/wp.2016.004
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    References listed on IDEAS

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    Cited by:

    1. Lukas Buchheim & Martin Watzinger, 2017. "The Employment Effects of Countercyclical Infrastructure Investments," CESifo Working Paper Series 6383, CESifo Group Munich.
    2. Dupor, William D. & Rodrigo , Guerrero, 2017. "The Aggregate and Relative Economic Effects of Medicaid and Medicare Expansions," Working Papers 2017-27, Federal Reserve Bank of St. Louis.

    More about this item

    Keywords

    Fiscal policy; Fiscal multipliers; spillovers;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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