Working Paper: NBER ID: w17391
Authors: Emi Nakamura; J. N. Steinsson
Abstract: We use rich historical data on military procurement spending across U.S. regions to estimate the effects of government spending in a monetary union. Aggregate military build-ups and draw- downs have differential effects across regions. We use this variation to estimate an "open economy relative multiplier" of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed economy aggregate multiplier. The closed economy aggregate multiplier is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind." In contrast, our open economy relative multiplier "differences out" these effects because different regions in the union share a common monetary and tax policy. Our estimates provide evidence in favor of models in which demand shocks can have large effects on output.
Keywords: Fiscal Stimulus; Monetary Union; Government Spending; Regional Output
JEL Codes: E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regional military procurement spending (H56) | regional output (R15) |
| military buildups (H56) | regional military procurement spending (H56) |
| national military spending trends (H56) | regional military procurement spending (H56) |
| regional military procurement spending (H56) | output and employment in different regions (R15) |