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A Local-Spillover Decomposition of the Causal Effect of U.S. Defense Spending Shocks

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Abstract

This paper decomposes the causal effect of government defense spending into: (i) a local (or direct) effect, and (ii) a spillover (or indirect) effect. Using state-level defense spending data, we show that a negative cross-state spillover effect explains the existing simultaneous findings of a low aggregate multiplier and a high local multiplier. We show that enlisting disaggregate data improves the precision of aggregate effect estimates, relative to using aggregate time series alone. Moreover, we compare two-step efficient GMM with two alternative moment weighting approaches used in existing research.

Suggested Citation

  • Timothy G. Conley & Bill Dupor & Mahdi Ebsim & Jingchao Li & Peter B. McCrory, 2020. "A Local-Spillover Decomposition of the Causal Effect of U.S. Defense Spending Shocks," Working Papers 2020-014, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:88187
    DOI: 10.20955/wp.2020.014
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    More about this item

    Keywords

    local-spillover decomposition; GMM; fiscal multipliers;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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