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

RePEc Short ID: pdu275
ORCID iD: 0000-0002-2407-2792

Conley, Timothy G.; Dupor, Bill; Ebsim, Mahdi; Li, Jingchao; McCrory, Peter B.

doi:10.20955/wp.2020.014

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; GMM; fiscal multipliers;

JEL Classification: E00;

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