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Macro fiscal policy in economic unions: states as agents

Author

Listed:
  • Gerald A. Carlino
  • Robert P. Inman

    (National Bureau of Economic Research
    Wharton School
    Harvard University
    Federal Reserve Bank)

Abstract

An important component of the American Recovery and Reinvestment Act?s (ARRA?s) $796 billion proposed stimulus budget was $318 billion in fiscal assistance to state and local governments, yet the authors have no precise estimates of the impact of such assistance on the macroeconomy. In evaluating ARRA, both the Council of Economic Advisors (CEA) and the Congressional Budget Office (CBO) used instead the impacts of direct federal spending and tax relief. These estimates miss the role of states as agents. The authors provide estimates of aid?s multiplier effects allowing explicitly for state behavior, first from an SVAR analysis separating federal aid from federal tax relief, second from a narrative analysis using the political record for unanticipated federal aid programs, and third from constructed macroeconomic estimates implied by an estimated model of state governments? fiscal choices. The authors reach three conclusions. First, federal transfers to state and local governments are less stimulative than transfers to households and firms. Second, federal aid for welfare spending is more stimulative than is general purpose aid. Third, an estimated model of state government fiscal behavior provides a microeconomic foundation for the observed macroeconomic impacts of aid.

Suggested Citation

  • Gerald A. Carlino & Robert P. Inman, 2014. "Macro fiscal policy in economic unions: states as agents," Working Papers 14-20, Federal Reserve Bank of Philadelphia, revised 31 Jul 2014.
  • Handle: RePEc:fip:fedpwp:14-20
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    References listed on IDEAS

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    Cited by:

    1. repec:wly:econjl:v:128:y:2018:i:611:p:1476-1508 is not listed on IDEAS
    2. Gabriel Chodorow-Reich, 2017. "Geographic Cross-Sectional Fiscal Multipliers: What Have We Learned?," Working Paper 458091, Harvard University OpenScholar.
    3. Bill Dupor & Peter B. McCrory, 2018. "A Cup Runneth Over: Fiscal Policy Spillovers from the 2009 Recovery Act," Economic Journal, Royal Economic Society, vol. 128(611), pages 1476-1508, June.
    4. Peter McCrory & Bill Dupor, 2015. "Fiscal Policy Spillovers: Points of Employment to Places of Residence," 2015 Meeting Papers 47, Society for Economic Dynamics.
    5. Allan H. Meltzer, 2014. "Current Lessons from the Past: How the Fed Repeats Its History," Cato Journal, Cato Journal, Cato Institute, vol. 34(3), pages 519-539, Fall.

    More about this item

    Keywords

    American Recovery and Reinvestment Act; ARRA; Macroeconomics; Stimulus;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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