The effect of government spending on local economies during an economic downturn

Abstract

This paper provides quasi-experimental evidence on the short-run effects of government spending on subregional output and employment during an economic downturn. Our empirical analysis exploits exogenous regional variation in the Finnish Government consumption expenditures that resulted from the establishments of new asylum centers (in 2015 and 2016) and the contemporary Defense Force reform. We find that a change in local government spending by one percent of local output produces a 1.3 percent change in local output, and EUR100 000 of local government spending creates 1.84 additional jobs. Moreover, our evidence suggests that the output multiplier is asymmetric.