A Cup Runneth Over: Fiscal Policy Spillovers from the 2009 Recovery Act

Abstract

This article studies the effects of interregional spillovers from the American Recovery and Reinvestment Act of 2009 (the Recovery Act). Using cross‐county commuting data, we cluster US counties into local labour markets, each of which we further partition into two subregions. We then compare differential labour market outcomes and Recovery Act spending at the regional and subregional levels. Among pairs of subregions, we find evidence of fiscal policy spillovers. According to our benchmark specification, $1 of Recovery Act spending in a subregion increases its own wage bill by $0.64 and increases the wage bill in its neighbouring subregion by $0.50 during the first two years following the Act's passage. The spillover effect occurs in the service sector, whereas the direct effect occurs in both the services and goods‐producing sector.

Regional Consumption Responses and the Aggregate Fiscal Multiplier

“…The formula also includes minimum allocation rules to prevent states and localities from receiving disproportionately low funds. The next three largest components of the OJP were for 22 The information in this section of the appendix also appears as an appendix in Dupor and McCrory (2016).…”

“…An increase in the real wage increases consumer spending especially by low wealth, high-marginal propensity to consume (MPC) households who are mostly labor-income dependent. 5 Absent heterogeneity, our model generates a local and an Mehkari (2016) and Dupor and McCrory (2016). 4 In the Neoclassical model, the real wage decreases due to the negative wealth effect, which increases labor supply.…”

Local Fiscal Multipliers, Negative Spillovers and the Macroeconomy

“…To avoid this bias, I instrument for national military spending using the Ramey (2011a) defense spending news shock series. To preview the results, I temporarily put aside the issues of endogeneity and anticipation effects 4 The two papers most closely related to mine, with respect to estimating spillovers, are Dupor and McCrory (2015) and Suarez Serráto and Wingender (2014). Those papers find positive spillovers between geographically neighboring states.…”

Schools and Stimulus

“…More generally, other studies using microeconomic evidence that study the overall impact of the Recovery Act have focused mainly on economy-wide labor market outcomes. These include Chodorow-Reich et al (2012), Conley and Dupor (2013), Dupor and McCrory (2015), Feyrer and Sacerdote (2012) and Wilson (2012).…”