Working Paper Revision

Decomposing the Government Transfer Multiplier

Abstract: We estimate the local, spillover and aggregate causal effects of government transfers on personal income. We identify exogenous changes in federal transfers to residents at the state-level using legislated social security cost-of-living adjustments between 1952 and 1974. Each effect is measured as a multiplier: the change in personal income in response to a one unit change in transfers. The local multiplier, i.e., the effect of own-state transfers on own-state income holding fixed other state's income, at a four-quarter horizon is approximately 3.4. The cross-state spillover multiplier is about -0.7, but not statistically different from zero. The aggregate multiplier, i.e., the sum of its local and spillover components, equals 2.7. More generally, our paper provides a template for conducting inference that decomposes an aggregate effect into its local and spillover components.

Keywords: local-spillover decomposition; government transfers; social security;

JEL Classification: E62; J32;

https://doi.org/10.20955/wp.2023.017

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2023-11-17

Number: 2023-017

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