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Emi Nakamura and Jon Steinsson: "Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions"

Nakamura and Steinsson:

We use rich historical data on military procurement spending across United States regions to estimate the effects of government spending in a monetary union. Aggregate military build-ups and draw-downs have differential effects across regions. We use this variation to estimate an "open economy relative multiplier" of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed-economy aggregate multiplier. The closed-economy aggregate multiplier is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind". In contrast, our estimate "differences out" these effects because different regions of the U.S. share a common monetary and tax policy. Our estimate provides evidence in favor of models in which demand shocks have large effects on output.

An open economy relative multiplier of 1.5 for states, of 3.5 for high-unemployment states, and of 0.7 for low-unemployment states.

Given the magnitude of spillovers across state lines, an "open economy relative multiplier" of 1.5 is very large indeed--corresponding to a "closed-economy aggregate multiplier" substantially north of 5…

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