Working Paper: NBER ID: w24093
Authors: Mario J. Crucini; Nam T. Vu
Abstract: One of the statements of purpose of the American Recovery and Reinvestment Act (ARRA) was “to assist those most impacted by the recession.” To consider this facet, the grants-in-aid portion of the ARRA is assessed from the perspective of fiscal federalism. We estimate a trend-stationary autoregressive model of county-level wage income dynamics where each county is subject to a common shock (with county-specific factor loading) and an idiosyncratic shock. We then ask if counties that experienced larger negative wage income shocks during the Great Contraction subsequently received more transfers per capita in the form of grants-in-aid. The fact that the negative business cycle shocks pre-date the passage of the ARRA and subsequent disbursements allows identification of the risk-pooling channel of the grants before fiscal multiplier effects confound these two channels. We find statistically significant and economically large risk-pooling effects.
Keywords: American Recovery and Reinvestment Act; Great Recession; Fiscal Federalism; Income Inequality; Risk-Pooling
JEL Codes: D31; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Negative wage income shocks (H31) | ARRA grants-in-aid (H77) |
| ARRA grants-in-aid (H77) | county-level wage income dynamics (J31) |
| County-specific shocks (C21) | offset by ARRA grants-in-aid (H77) |
| Macroeconomic component of private wage shocks (E39) | mitigated by ARRA grants-in-aid (H84) |
| County-specific component of private wages (J39) | no offset from ARRA grants-in-aid (H77) |