Working Paper

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


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.

Keywords: local-spillover decomposition; fiscal multiplier; GMM;

JEL Classification: E00;

https://doi.org/10.20955/wp.2020.014

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2020-06-16

Number: 2020-014

Pages: 18 pages