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Title: Estimating Local Fiscal Multipliers

Citation Type: Miscellaneous

Publication Year: 2010

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Abstract: We propose a new identification strategy to measure the causal impact of government spending on the economy. Our methodology isolates exogenous cross-sectional variation in government spending using a novel instrument. We use the fact that a large number of federal spending programs depend on local population levels. Every ten years, the Census provides a count of local populations. A different method is used to estimate non-Census year populations and this discontinuous change in methodology leads to variation in the allocation of billions of dollars in federal spending. We use this variation to analyze the effect of exogenous changes in federal spending across counties on local economic outcomes. Our IV estimates imply that government spending has a local income multiplier of 1.88 and an estimated cost per job of $30,000 per year. These estimates are robust to the inclusion of potential confounders, such as local demand shocks. We also show that the local effects of government spending are not larger than aggregate effects at the MSA and state levels. Finally, we characterize the cross-sectional heterogeneity of the impacts of government spending. These results conrm that government spending has a higher impact in low growth areas and leads to reduction of inequality in economic outcomes.

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Authors: Wingender, Philippe; Surez Serrato, Juan Carlos

Publisher: University of California, Berkeley

Data Collections: IPUMS NHGIS

Topics: Other, Poverty and Welfare

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