Macro Fiscal Policy in Economic Unions: States as Agents

46 Pages Posted: 1 Aug 2014

See all articles by Gerald A. Carlino

Gerald A. Carlino

Federal Reserve Bank of Philadelphia

Robert P. Inman

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2014

Abstract

An important component of the American Recovery and Reinvestment Act’s (ARRA’s) $796 billion proposed stimulus budget was $318 billion in fiscal assistance to state and local governments, yet the authors have no precise estimates of the impact of such assistance on the macroeconomy. In evaluating ARRA, both the Council of Economic Advisors (CEA) and the Congressional Budget Office (CBO) used instead the impacts of direct federal spending and tax relief. These estimates miss the role of states as agents. The authors provide estimates of aid’s multiplier effects allowing explicitly for state behavior, first from an SVAR analysis separating federal aid from federal tax relief, second from a narrative analysis using the political record for unanticipated federal aid programs, and third from constructed macroeconomic estimates implied by an estimated model of state governments’ fiscal choices. The authors reach three conclusions. First, federal transfers to state and local governments are less stimulative than transfers to households and firms. Second, federal aid for welfare spending is more stimulative than is general purpose aid. Third, an estimated model of state government fiscal behavior provides a microeconomic foundation for the observed macroeconomic impacts of aid.

Keywords: American Recovery and Reinvestment Act, ARRA, macroeconomics

Suggested Citation

Carlino, Gerald A. and Inman, Robert P., Macro Fiscal Policy in Economic Unions: States as Agents (July 2014). FRB of Philadelphia Working Paper No. 14-20. Available at SSRN: https://ssrn.com/abstract=2474564 or http://dx.doi.org/10.2139/ssrn.2474564

Gerald A. Carlino (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Robert P. Inman

University of Pennsylvania - Finance Department ( email )

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215-898-8299 (Phone)
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National Bureau of Economic Research (NBER)

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