Title: Local and aggregate fiscal policy multipliers
Authors: William Dupor - Federal Reserve Bank of St. Louis (United States) [presenting]
Bill Dupor - Federal Reserve Bank of St Louis (United States)
Abstract: The effect of defense spending on the U.S. macroeconomy since World War II is estimated. First, a new panel dataset of state-level federal defense contracts is constructed. Second, observations across states are summed and, using the resulting time series, the aggregate effect of defense spending on national income and employment is estimated via instrumental variables. Third, local multipliers are estimated 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, it is found that the two differ dramatically. It is inferred that the local multiplier estimates alone do not provide useful information about the aggregate effects of policy. Finally, the panel aspect of the data are used to dramatically increase the precision of estimates of the aggregate multiplier (relative to using the aggregate data alone) by including a spillover term in the panel regressions. The baseline aggregate findings are a long-run multiplier on income equal to 1.6, a moderate long-run effect on employment, and no effect on income or employment effect in the short run. The results suggest that lags in the effects of defense spending are so long that they render countercyclical spending policies ineffective. In addition, negative short-run spillovers on employment of spending across state borders are found.