Partisanship and Fiscal Policy in Economic Unions: Evidence from U.S. States
Abstract: In economic unions the ﬁscal authority consists not of one, but many governments. We analyze whether partisanship of state-level politicians aﬀects federal policies, such as ﬁscal stimulus in the U.S. Using data from close elections, we ﬁnd partisan diﬀerences in the marginal propensity to spend federal transfers: Republican governors spend less. This partisan diﬀerence has tended to increase with measures of polarization. We quantify the aggregate eﬀects in a New Keynesian model of Republican and Democratic states in a monetary union: Lowering partisan diﬀerences to levels prevailing during less polarized times increases the transfer multiplier by 0.30. The observed changes in the share of Republican governors lead to variation in the multiplier of 0.20 in the model. Local projection methods support this prediction.
File(s): File format is application/pdf https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2020/wp20-20.pdf
Provider: Federal Reserve Bank of Philadelphia
Part of Series: Working Papers
Publication Date: 2020-06-01