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Fiscal Stimulus in Economic Unions: What Role for States?

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  • Gerald Carlino
  • Robert P. Inman

Abstract

The Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy, and particularly the importance of state and local governments, to the center stage of macroeconomic policy-making. This paper addresses three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? Analysis of US state fiscal policies show state deficits (in particular from tax cuts) can stimulate state economies in the short-run, but that there are significant job spillovers to neighboring states. Second, to internalize these spillovers, what central government fiscal policies are most effective for stimulating income and job growth? Both federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower income assistance are effective, with one and two year multipliers greater than 2.0. Third, how are states, as politically independent agents, motivated to provide increased transfers to lower income households? The answer is matching (price subsidy) assistance for such spending. The intergovernmental aid is spent immediately by the states and supports assistance to those most likely to spend new transfers.

Suggested Citation

  • Gerald Carlino & Robert P. Inman, 2015. "Fiscal Stimulus in Economic Unions: What Role for States?," NBER Working Papers 21680, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21680
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    Cited by:

    1. Congressional Budget Office, 2018. "Fiscal Substitution of Investment for Highway Infrastructure: Working Paper 2018-08," Working Papers 54371, Congressional Budget Office.
    2. Barbara Klein & Klaas Staal, 2017. "Was the American Recovery and Reinvestment Act an Economic Stimulus?," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 23(4), pages 395-404, November.
    3. Gerald Carlino & Thorsten Drautzburg & Robert Inman & Nicholas Zarra, 2023. "Partisanship and Fiscal Policy in Economic Unions: Evidence from US States," American Economic Review, American Economic Association, vol. 113(3), pages 701-737, March.
    4. Foremny, Dirk & Solé-Ollé, Albert, 2016. "Who's coming to the rescue? Revenue-sharing slumps and implicit bailouts during the Great Recession," ZEW Discussion Papers 16-049, ZEW - Leibniz Centre for European Economic Research.
    5. Carlino, Gerald & Drautzburg, Thorsten & Inman, Robert & Zarra, Nicholas, 2020. "Partisanship and Fiscal Policy in Federal Unions: Evidence from US States," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224550, Verein für Socialpolitik / German Economic Association.

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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