Working Paper

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.

Keywords: partisanship; flypaper effect; intergovernmental transfers; fiscal multiplier; monetary unions; regression discontinuity.;

JEL Classification: C24; E62; F45; H72; H77;

https://doi.org/10.21799/frbp.wp.2020.20

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2020-06-01

Number: 20-20

Pages: 56