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American Economic Journal: Economic Policy: Vol. 4 No. 2 (May 2012)

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Fiscal Policy Multipliers on Subnational Government Spending

Article Citation

Clemens, Jeffrey, and Stephen Miran. 2012. "Fiscal Policy Multipliers on Subnational Government Spending." American Economic Journal: Economic Policy, 4(2): 46-68.

DOI: 10.1257/pol.4.2.46

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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Authors

Clemens, Jeffrey (Stanford Institute for Economic Policy Research, Stanford U)
Miran, Stephen (Lily Pond Capital Management LLC, New York)

JEL Classifications

C51: Model Construction and Estimation
E32: Business Fluctuations; Cycles
E62: Fiscal Policy
H72: State and Local Budget and Expenditures

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