A Local-Spillover Decomposition of the Causal Effect of U.S. Defense Spending Shocks

Timothy Conley, Bill Dupor, Mahdi Ebsim, Jingchao Li and Peter McCrory

No 2020-014, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper decomposes the causal effect of government defense spending into: (i) a local (or direct) effect, and (ii) a spillover (or indirect) effect. Using state-level defense spending data, we show that a negative cross-state spillover effect explains the existing simultaneous findings of a low aggregate multiplier and a high local multiplier. We show that enlisting disaggregate data improves the precision of aggregate effect estimates, relative to using aggregate time series alone. Moreover, we compare two-step efficient GMM with two alternative moment weighting approaches used in existing research.

Keywords: local-spillover decomposition; GMM; fiscal multipliers (search for similar items in EconPapers)
JEL-codes: E00 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2020-06-16
New Economics Papers: this item is included in nep-mac
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DOI: 10.20955/wp.2020.014

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