Fiscal Policy Multipliers on Subnational Government Spending

Jeffrey P. Clemens · Stephen I. Miran

220 citations0/0 files storedAmerican Economic Journal Economic Policy

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Fiscal Policies and Political Economy Local Government Finance and Decentralization Fiscal Policy and Economic Growth

Abstract

Balanced budget requirements lead to substantial pro-cyclicality in state government spending, with the stringency of a state's rules driving the pace at which it must adjust to shocks. We show that fiscal institutions can generate natural experiments in deficit-financed spending that are informative regarding fiscal stabilization policy. Alternative sources of variation in subnational fiscal policy often implicitly involve “windfall” financing, which precludes any effect of future debt or taxation on current consumption and investment. Consistent with a role for these “Ricardian” effects, our estimates are smaller than those in related studies, implying an on-impact multiplier below 1. (JEL C51, E32, E62, H72)

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References

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