On December 12, 2019, Fed in Print will introduce its new platform for discovering content. Please direct your questions to Anna Oates

Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of St. Louis
Working Papers
Local and Aggregate Fiscal Policy Multipliers
William D. Dupor
Guerrero Rodrigo
Abstract

In this paper, we estimate the effect of defense spending on the U.S. macroeconomy since World War II. First, we construct a new panel dataset of state-level federal defense contracts. Second, we sum observations across states and, using the resulting time series, estimate the aggregate effect of defense spending on national income and employment via instrumental variables. Third, we estimate local multipliers using the state-level data, which measures the relative effect on economic activity due to relative differences in defense spending across states. Comparing the aggregate and local multiplier estimates, we find that the two deliver similar results, providing a case in which local multiplier estimates may be reliable indicators of the aggregate effects of fiscal policy. We also estimate spillovers using interstate commodity flow data and find some evidence of small positive spillovers, which explain part of the (small) difference between the estimated local and aggregate multipliers. Across a wide range of specifications, we estimate income and employment multipliers between zero and 0.5. We reconcile this result with the greater-than-one multipliers found in Nakamura and Steinsson (2014) by analyzing the impact of the Korean War episode in the estimation.


Download Full text
Download https://dx.doi.org/10.20955/wp.2016.004
Cite this item
William D. Dupor & Guerrero Rodrigo, Local and Aggregate Fiscal Policy Multipliers, Federal Reserve Bank of St. Louis, Working Papers 2016-4, 29 Mar 2016, revised 02 Jun 2017.
More from this series
JEL Classification:
Subject headings:
Keywords: Fiscal policy; Fiscal multipliers; spillovers
DOI: 10.20955/wp.2016.004
For corrections, contact Anna Oates ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal