A Cup Runneth Over: Fiscal Policy Spillovers from the 2009 Recovery Act

Authors


  • The authors thank Tim Conley and Ana Maria Santacreu for useful conversations and also the editor and three referees for valuable comments and suggestions. The authors thank seminar and conference participants at the Federal Reserve Bank of St. Louis, the Society for Economic Dynamics meeting and the Monetary Policy in a Global Setting conference. A repository containing government documents, data sources, a bibliography and other relevant information pertaining to the Recovery Act is available at billdupor.weebly.com. The analysis and conclusions set forth do not reflect the views of the Federal Reserve Bank of St. Louis, or the Federal Reserve System.

Abstract

This article studies the effects of interregional spillovers from the American Recovery and Reinvestment Act of 2009 (the Recovery Act). Using cross-county commuting data, we cluster US counties into local labour markets, each of which we further partition into two subregions. We then compare differential labour market outcomes and Recovery Act spending at the regional and subregional levels. Among pairs of subregions, we find evidence of fiscal policy spillovers. According to our benchmark specification, $1 of Recovery Act spending in a subregion increases its own wage bill by $0.64 and increases the wage bill in its neighbouring subregion by $0.50 during the first two years following the Act's passage. The spillover effect occurs in the service sector, whereas the direct effect occurs in both the services and goods-producing sector.

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