Fiscal Stimulus in Economic Unions: What Role for States?

Gerald A. Carlino

Federal Reserve Bank of Philadelphia

Robert P. Inman

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


FRB of Philadelphia Working Paper No. 15-41

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 policymaking. This paper addresses three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? An analysis of U.S. 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. Central government fiscal policies can best internalize these spillovers. Second, what central government fiscal policies are most effective for stimulating income and job growth? A structural vector autoregression analysis for the U.S. aggregate economy from 1960 to 2010 shows that federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower income assistance are both 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.

Number of Pages in PDF File: 67

Keywords: Fiscal federalism, Intergovernmental aid, Aggregate Stabilization policy, Multiplier analysis

JEL Classification: E6, H3, H7, R5

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Date posted: November 18, 2015  

Suggested Citation

Carlino, Gerald A. and Inman, Robert P., Fiscal Stimulus in Economic Unions: What Role for States? (2015-11-16). FRB of Philadelphia Working Paper No. 15-41. Available at SSRN: https://ssrn.com/abstract=2691901

Contact Information

Gerald A. Carlino (Contact Author)
Federal Reserve Bank of Philadelphia ( email )
Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-6434 (Phone)
215-574-4364 (Fax)
Robert P. Inman
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-8299 (Phone)
215-898-8200 (Fax)

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