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The Local-Spillover Decomposition of an Aggregate Causal Effect

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Abstract

This paper presents a method to decompose the causal effect of government defense spending into: (i) a local (or direct) effect, and (ii) a spillover (or indirect) effect. Each effect is measured as a multiplier: the unit change in output of a one unit change in government spending. We apply this method to study the effect of U.S. defense spending on output using regional panel data. We estimate a positive local multiplier and a negative spillover multiplier. By construction, the sum of the local and spillover multipliers provides an estimate of the aggregate multiplier. The aggregate multiplier is close to zero and precisely estimated. We show that enlisting disaggregate data improves the precision of aggregate effect estimates, relative to using aggregate time series alone. Our paper provides a template for researchers to conduct inference about local, spillover and aggregate causal effects in a unified framework.

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  • Timothy G. Conley & Bill Dupor & Mahdi Ebsim & Jingchao Li & Peter B. McCrory, 2021. "The Local-Spillover Decomposition of an Aggregate Causal Effect," Working Papers 2021-006, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:91632
    DOI: 10.20955/wp.2021.006
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    References listed on IDEAS

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    1. Dupor, Bill & Guerrero, Rodrigo, 2017. "Local and aggregate fiscal policy multipliers," Journal of Monetary Economics, Elsevier, vol. 92(C), pages 16-30.
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    3. McCrory, Peter B, 2020. "Tradable Spillovers of Fiscal Policy: Evidence from the 2009 Recovery Act," Institute for Research on Labor and Employment, Working Paper Series qt04n482qf, Institute of Industrial Relations, UC Berkeley.
    4. Valerie A. Ramey & Sarah Zubairy, 2018. "Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 850-901.
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    8. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
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    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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