Beggaring Thy Neighbor at the State and Local Level

Abstract

An expanding literature explores the size of the fiscal multiplier at the state and local level. Often, these papers ignore the “general equilibrium” effects of fiscal policy. That is, they ignore the overall impact on a country like the United States and only focus on the effect on the economy of the individual locality. When general equilibrium effects are discussed, they are often thought of as “spillovers” affecting nearby localities. However, this interpretation is only valid on its own terms in specific macroeconomic conditions or with specific assumptions regarding the policy function of the central bank. It may not be useful generally to view these multipliers as policy-relevant unless localities are interested in beggaring thy neighbor by shifting aggregate demand from other localities to themselves.

Keywords: Fiscal Policy, Local Multipliers, Fiscal Federalism

JEL Classification: E62, R58