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Nonlinear effects of government spending shocks in the USA: Evidence from state‐level data
Author(s) -
Mumtaz Haroon,
SunderPlassmann Laura
Publication year - 2020
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2800
Subject(s) - business cycle , fiscal multiplier , economics , recession , government spending , multiplier (economics) , panel data , econometrics , nonlinear system , government (linguistics) , fiscal policy , state (computer science) , monetary economics , macroeconomics , mathematics , linguistics , philosophy , physics , algorithm , quantum mechanics , welfare , market economy
Summary This paper uses state‐level data to estimate the effect of government spending shocks during expansions and recessions. By employing a mixed‐frequency framework, we are able to include a long span of annual state‐level government spending data in our nonlinear quarterly panel VAR model. We find evidence that for the average state the fiscal multiplier is larger during recessions. However, there is substantial heterogeneity across the cross‐section. The degree of nonlinearity in the effect of spending shocks is larger in states that are subject to a higher degree of financial frictions. In contrast, states with a prevalence of manufacturing, mining and agricultural industries tend to have multipliers that are more similar across business cycle phases.