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Atlanta Marriott Marquis, International 9
Hosted By:
American Economic Association
that short-lived government investment shocks have a smaller fiscal multiplier
than government consumption shocks. I test this prediction in a panel of OECD
countries using real-time forecasts of government consumption and investment
to purify changes in purchases of their predicted components. Consistent with
theory, I estimate a government investment multiplier near zero and a government
consumption multiplier of approximately 0.8. These findings suggest that
fiscal stimulus packages which contain large government investment components
may not be as effective at stimulating aggregate demand as commonly thought.
Fiscal Policy: Combining Micro Data and Macro Models
Paper Session
Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM
- Chair: Christoph Boehm, University of Texas-Austin
Geographic Cross-Sectional Fiscal Spending Multipliers: What Have We Learned?
Abstract
A geographic cross-sectional fiscal spending multiplier measures the effect of an increase in spending in one region in a monetary union. Empirical studies of such multipliers have proliferated in recent years. In this paper, I review this research and what the evidence implies for national multipliers. Based on an updated analysis of the American Recovery and Reinvestment Act and a survey of empirical studies, my preferred point estimate for a cross-sectional output multiplier is 1.8. Economic theory of how to map these multipliers into a national multiplier has also advanced. Drawing on the theoretical literature, the paper discusses conditions under which the cross-sectional multiplier provides a rough lower bound for a particular national multiplier, the closed economy zero lower bound multiplier. Putting these elements together, the cross-sectional evidence suggests a national zero lower bound multiplier of about 1.7 or above, at the upper end of most studies based on time series evidence. The paper concludes by offering suggestions for future research on cross-sectional multipliers.Tax Policy and Lumpy Investment Behavior: Evidence from China's VAT Reform
Abstract
How do firms respond to fiscal incentives for investment? We study a corporate tax reform at the beginning of 2009 in China that affected the user cost of capital by changing the deductibility of fixed assets expenditures under the value-added tax (VAT) regime. The reform changed investment incentives by allowing firms to deduct input VAT, 17 percent of the purchase price, on eligible capital from taxable income. We show that firms increased investment in types of capital favored by the reform while decreased investment in types of capital that were not affected by the reform. In addition, compared to firms that were already benefiting from this policy due to a pilot project, non-pilot firms increased overall investment in the extensive margin. These results show that firms had significant responses to this policy that was designed to stimulate business investment during the financial crisis.Government Consumption and Investment: Does the Composition of Purchases Affect the Multiplier?
Abstract
I show that a large and conventional class of macroeconomic models predictsthat short-lived government investment shocks have a smaller fiscal multiplier
than government consumption shocks. I test this prediction in a panel of OECD
countries using real-time forecasts of government consumption and investment
to purify changes in purchases of their predicted components. Consistent with
theory, I estimate a government investment multiplier near zero and a government
consumption multiplier of approximately 0.8. These findings suggest that
fiscal stimulus packages which contain large government investment components
may not be as effective at stimulating aggregate demand as commonly thought.
Fiscal Policy in Monetary Unions: State Partisanship and its Macroeconomic Effects
Abstract
States have become an increasingly important agent of fiscal policy in the U.S. Motivated by the large literature that finds increases in partisanship among policymakers, we analyze whether partisanship affects state fiscal policy and what its macroeconomic effects are. Using data from close elections, we find strong partisanship effects in the passthrough of federal transfers to state: Republican governors spend less of federal funds and, instead, cut distortionary taxes. Transfers are an important vehicle of federal policies, with a share of 40\% in the 2009 stimulus bill and funding the 2014 Medicaid expansion. We provide causal evidence that the passthrough of federal transfers by state governments varies between Republican and Democratic governors, using a regression-discontinuity design. To analyze the macroeconomic effects of this partisan behavior, we use a structural model of Republican and Democratic regions in a monetary union. The model delivers an aggregate transfer multiplier that is significantly lower with partisan differences. This is due to distortionary tax cuts that lower the initial aggregate demand effects, but make Republican states more competitive with a delay. Our model implies that the transfer multiplier varies over time with the partisan affiliation of governors and we find empirical support for this prediction using time-varying local-projection methods.JEL Classifications
- E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- H3 - Fiscal Policies and Behavior of Economic Agents