Abstract
One of the statements of purpose of the American Recovery and Reinvestment Act (ARRA) was “to assist those most impacted by the recession.” To consider this facet, the grants-in-aid portion of the ARRA is assessed from the perspective of fiscal federalism. We estimate a trend-stationary autoregressive model of county-level wage income dynamics where each county is subject to a common shock (with county-specific factor loading) and an idiosyncratic shock. We then ask if counties that experienced larger negative wage income shocks during the Great Contraction subsequently received more transfers per capita in the form of grants-in-aid. The fact that the negative business cycle shocks pre-date the passage of the ARRA and subsequent disbursements allows identification of the risk-pooling channel of the grants before fiscal multiplier effects confound these two channels. We find statistically significant and economically large risk-pooling effects.
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