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Regional Consumption Responses and the Aggregate Fiscal Multiplier

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Abstract

We use regional variation in the American Recovery and Reinvestment Act (2009-2012) to analyze the effect of government spending on consumer spending. Our consumption data come from household-level retail purchases in Nielsen and auto purchases from Equifax credit balances. We estimate that a $1 increase in county-level government spending increases consumer spending by $0.18. We translate the regional consumption responses to an aggregate fiscal multiplier using a multi-region, New Keynesian model with heterogeneous agents and incomplete markets. Our model successfully generates the estimated positive local multiplier, a result that distinguishes our incomplete markets model from models with complete markets. The aggregate consumption multiplier is 0.4, which implies an output multiplier higher than one. The aggregate consumption multiplier is almost twice the local estimate because trade linkages propagate government spending across regions.

Suggested Citation

  • Dupor, William D. & Karabarbounis, Marios & Kudlyak, Marianna & Mehkari, M. Saif, 2018. "Regional Consumption Responses and the Aggregate Fiscal Multiplier," Working Paper 18-4, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:18-04
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    1. repec:wly:econjl:v:128:y:2018:i:611:p:1476-1508 is not listed on IDEAS
    2. 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.
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    Keywords

    Consumer Spending; Fiscal Multiplier; Regional Variation; Heterogeneous Agents.;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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