Local Fiscal Multipliers, Negative Spillovers and the Macroeconomy

Abstract

This paper analyzes the impact of within-state military spending and national military spending on a state's employment. I estimate that, while within-state spending increases that state's employment (i.e., a positive local effect), an increase in national military spending ceteris paribus decreases employment in the state (i.e., a negative spillover effect). The combined local and spillover effects imply an aggregate employment effect that is close to zero. The estimates are consistent with a resource reallocation explanation: Persons take jobs in or move to a state with increased military spending, but they leave when increased out-of-state military spending creates opportunities elsewhere. I find support for this interpretation based on estimates of population changes by demographic groups in response to spending shocks.

Households' Balance Sheets and the Effect of Fiscal Policy

“…In the literature, there is no consensus about the effect of government spending shocks on employment. Using VAR analysis, Caldara and Kamps (2008) estimate that employment does not respond to government spending shocks, while Dupor and Guerrero (2016) estimate small employment effects that can be negative if fiscal policy starts when unemployment is low. However, also using a VAR, Yuan and Li (2000) show that a temporary government spending shock increases hours worked per worker but reduces employment.…”