Regional Consumption Responses and the Aggregate Fiscal Multiplier

Abstract

We use regional variation in the American Recovery and Reinvestment Act (2009-2012) to analyze the effect of government spending on consumer spending. Our consumption data come from household-level retail purchases in Nielsen and auto purchases from Equifax credit balances. We estimate that a $1 increase in county-level government spending increases consumer spending by $0.29. We translate the regional consumption responses to an aggregate fiscal multiplier using a multi-region, New Keynesian model with heterogeneous agents and incomplete markets. Our model successfully generates the estimated positive local multiplier, a result that distinguishes our incomplete markets model from models with complete markets. The aggregate consumption multiplier is 0.64, which implies an output multiplier higher than one. The aggregate consumption multiplier is larger than the local estimate because trade linkages propagate government spending across regions.

Macroeconomic Frameworks

“…The model predicts a large (relative to existing theories) response of land prices and consumption of imports. While the predicted consumption response is less than the (large) estimated response of consumption (spending on new cars), it is in line with estimates from other studies that have examined the effect of other forms of government spending on local consumption (e.g., Dupor et al 2019).…”

“…The local consumption increase is consistent with regional evidence from government purchases inDupor et al (2019).…”

Stock Market Wealth and the Real Economy: A Local Labor Market Approach

“…As we have emphasized, the nontradable share of consumption expenditure η is a difficult parameter to calibrate given available regional data Dupor et al (2019). use the Commodity Flow Survey to estimate that two-thirds of shipments remain within a metropolitan area and 61% remain within a county.…”

Regional data in macroeconomics: Some advice for practitioners

“…In general, with factors of production immobile across regions, demand shocks in one region have positive spillovers onto factor demand in other regions. The intuition (and formalism) follows standard trade and open economy theory (Nakamura and Steinsson, 2014;Farhi and Werning, 2016;Chodorow-Reich, Gopinath, et al, Forthcoming;Dupor, Karabarbounis, et al, 2018). Higher demand in region i raises local incomes and prices.…”