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American Economic Review: Vol. 104 No. 3 (March 2014)

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Fiscal Stimulus in a Monetary Union: Evidence from US Regions

Article Citation

Nakamura, Emi, and Jón Steinsson. 2014. "Fiscal Stimulus in a Monetary Union: Evidence from US Regions." American Economic Review, 104(3): 753-92.

DOI: 10.1257/aer.104.3.753

Abstract

We use rich historical data on military procurement to estimate the effects of government spending. We exploit regional variation in military build-ups to estimate an "open economy relative multiplier" of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed economy aggregate multiplier. The latter is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind." Our open economy relative multiplier "differences out" these effects because monetary and tax policies are uniform across the nation. Our evidence indicates that demand shocks can have large effects on output.

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Authors

Nakamura, Emi (Columbia U)
Steinsson, Jón (Columbia U)

JEL Classifications

E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian
E32: Business Fluctuations; Cycles
E62: Fiscal Policy
F33: International Monetary Arrangements and Institutions
H56: National Security and War
H57: National Government Expenditures and Related Policies: Procurement
R12: Size and Spatial Distributions of Regional Economic Activity


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