Local fiscal multipliers of different government spending categories

Abstract

This paper compares multipliers of different categories of US federal government spending, and in doing so provides a new insight as to why fiscal multipliers may differ across countries and time. We identify exogenous federal government spending shocks at the state level for defense and non-defense spending. Using a projection-based approach, we estimate the cumulative multiplier due to shocks in either of these spending categories. Our results indicate that defense spending yields lower multipliers than non-defense spending. Thus, focusing only on defense spending may result in underestimating the multiplier for government spending.