A Local-Spillover Decomposition of the Causal Effect of U.S. Defense Spending Shocks
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.
JEL Classification: E00;
File format is application/pdf
Description: Full Text
Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2020-06-16