Fiscal Stimulus in Economic Unions: What Role for States?

66 Pages Posted: 2 Nov 2015

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 2 versions of this paper

Date Written: October 2015

Abstract

The Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy, and particularly the importance of state and local governments, to the center stage of macroeconomic policy-making. This paper addresses three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? Analysis of US state fiscal policies show state deficits (in particular from tax cuts) can stimulate state economies in the short-run, but that there are significant job spillovers to neighboring states. Second, to internalize these spillovers, what central government fiscal policies are most effective for stimulating income and job growth? Both federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower income assistance are effective, with one and two year multipliers greater than 2.0. Third, how are states, as politically independent agents, motivated to provide increased transfers to lower income households? The answer is matching (price subsidy) assistance for such spending. The intergovernmental aid is spent immediately by the states and supports assistance to those most likely to spend new transfers.

Suggested Citation

Carlino, Gerald A. and Inman, Robert P., Fiscal Stimulus in Economic Unions: What Role for States? (October 2015). NBER Working Paper No. w21680. Available at SSRN: https://ssrn.com/abstract=2684964

Gerald A. Carlino (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Robert P. Inman

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
United States
215-898-8299 (Phone)
215-898-8200 (Fax)

National Bureau of Economic Research (NBER)

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