Working Paper: NBER ID: w28425
Authors: Gerald Carlino; Thorsten Drautzburg; Robert P. Inman; Nicholas Zarra
Abstract: Partisanship of state level politicians affect the impact of federal fiscal policy in the U.S. Using data from close gubernatorial elections, we find partisan differences in the marginal propensity to spend federal transfers since the early 1980's: Republican governors spend less. A New Keynesian model of partisan states in a monetary union implies sizable aggregate income effects from these partisan differences. First, the transfer multiplier would rise by 0.60 if Republican governors were to spend as much from federal aid as do Democratic governors. Second, the observed changes in the share of Republican governors imply variation in the fiscal multiplier of 0.40. Local projection regressions support this prediction.
Keywords: partisanship; fiscal policy; economic unions; federal transfers; marginal propensity to spend
JEL Codes: C24; E62; F45; H72; H74; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Partisanship of state-level governors (H70) | Impact of federal fiscal policy (E62) |
| Republican governors (H79) | Marginal propensity to spend federal transfers (H59) |
| Partisan differences in spending behaviors (H56) | Federal transfer multiplier (F16) |
| Aggregate impact of federal transfers (H59) | Partisan composition of state leadership (D72) |
| Partisanship (D72) | Fiscal outcomes (H68) |