In this paper we contribute to the literature by systematically comparing fiscal multipliers of different government spending categories. This is because the identification method often relies on a specific spending grant or event, while a comparison requires to devise a method which (i) could be applicable in a similar way to defense and non-defense spending and (ii) allows for causal inference in order to quantify fiscal multipliers. Indeed, no study has attempted to directly compare the multipliers across government spending categories in a unified methodological framework, relying on the same identification method. However, such a gap may also be driven by other differences between the papers. Comparing the fiscal multipliers in these different studies points at higher multipliers for non-defense spending at the state level. 2018) and the state levels (Leduc and Wilson 2013 Clemens and Miran 2012 Shoag 2016).
Similarly, there are studies investigating the effects of non-defense spending at the aggregate (Alesina et al. Footnote 1 Regarding defense spending, there are both estimates at the aggregate (Ramey and Zubairy 2018) and the state levels (Nakamura and Steinsson 2014 Dupor and Guerrero 2017).
#Spending multiplier macro definition series
Previous studies have estimated fiscal multipliers for defense and for non-defense spending, either at the national level using time series data, or at the sub-national level using panel data. From a policy perspective, it is important to know whether there is a difference in the effectiveness across government spending categories in order to effectively use specific counter-cyclical policy measures to dampen economic slowdowns. The mechanisms by which defense and non-defense spending affect the local economy may differ, and we hypothesize that their economic impact might also depend on the category of spending. Instead, non-defense spending, which includes social transfers, education, health, or infrastructure, is more aligned with the typical counter-cyclical stimulus tool. However, the way defense spending impacts the local economy may be quite indirect, and depends on the reaction from a few defense contractors.
Indeed, defense spending has been often used in the fiscal policy literature due to its acyclical property, allowing researchers to characterize defense spending shocks as events exogenous to the business cycle (Ramey 2019). Our investigation of the role of government spending categories starts with a simple comparison: defense spending versus non-defense spending. In this paper, we focus on another factor that may contribute to differences in fiscal multipliers, namely the category (or function) of government spending that dominates a fiscal policy stimulus. Economic factors, such as the state of the business cycle, the exchange rate regime, and the openness of a country, also affect the size of the multiplier (Ramey 2019). These differences are not only due to the empirical approaches used. However, the existing estimates of the fiscal multiplier vary substantially across studies. The effectiveness of a short-run spending stimulus can be assessed by estimating the fiscal multiplier, i.e., the additional income generated per unit of additional government spending. Menzie Chinn, forthcoming, The New Palgraveĭictionary \of Economics.A central question in macroeconomics is whether the government can effectively stimulate the economy by increasing spending or decreasing taxes.
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