Partisanship and Fiscal Policy in Economic Unions: Evidence from U.S. States

49 Pages Posted: 8 Feb 2021 Last revised: 2 Sep 2021

See all articles by Gerald A. Carlino

Gerald A. Carlino

Federal Reserve Bank of Philadelphia

Thorsten Drautzburg

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Robert P. Inman

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

Nicholas Zarra

New York University (NYU) - New York University

Date Written: February 2021

Abstract

Partisanship of state level politicians affect the impact of federal fiscal policy in the U.S. Using data from close gubernatorial elections, we find partisan differences in the marginal propensity to spend federal transfers since the early 1980's: Republican governors spend less. A New Keynesian model of partisan states in a monetary union implies sizable aggregate income effects from these partisan differences. First, the transfer multiplier would rise by 0.60 if Republican governors were to spend as much from federal aid as do Democratic governors. Second, the observed changes in the share of Republican governors imply variation in the fiscal multiplier of 0.40. Local projection regressions support this prediction.

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Suggested Citation

Carlino, Gerald A. and Drautzburg, Thorsten and Inman, Robert P. and Zarra, Nicholas, Partisanship and Fiscal Policy in Economic Unions: Evidence from U.S. States (February 2021). NBER Working Paper No. w28425, Available at SSRN: https://ssrn.com/abstract=3781312

Gerald A. Carlino (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Thorsten Drautzburg

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

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Robert P. Inman

University of Pennsylvania - Finance Department ( email )

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National Bureau of Economic Research (NBER)

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Nicholas Zarra

New York University (NYU) - New York University

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