Fiscal Stimulus in a Monetary Union: Evidence from US Regions
American Economic Review · 2014 · Volume 104 · Issue 3
Abstract
We use rich historical data on military procurement to estimate the effects of government spending. We exploit regional variation in military build-ups to estimate an "open economy relative multiplier" of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed economy aggregate multiplier. The latter is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind." Our open economy relative multiplier "differences out" these effects because monetary and tax policies are uniform across the nation. Our evidence indicates that demand shocks can have large effects on output.
Keywords
General Aggregative Models: Keynes, Keynesian, Post-Keynesian, Business Fluctuations, Cycles, Fiscal Policy, International Monetary Arrangements and Institutions, National Security and War, National Government Expenditures and Related Policies: Procurement, Size and Spatial Distributions of Regional Economic Activity
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