Working Paper 2017-01: Gabriel Chodorow-Reich

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012417-WP-cross-sectional-fiscal-multipliers

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Author:

Gabriel Chodorow-Reich, Assistant Professor of Economics, Harvard University


Abstract:

A geographic cross-sectional fiscal multiplier measures the effect of an increase in spending in one region in a monetary union. Empirical studies of such multipliers have proliferated in recent years. I review this research and find a cross-study mean cross-sectional output multiplier of about 2. Economic theory of how to map these multipliers into a national multiplier has also advanced. Drawing on the theoretical literature, I discuss conditions under which the cross-sectional multiplier can provide a rough lower bound for the closed economy deficit-financed constrained monetary policy multiplier. Putting these elements together, the cross-sectional evidence suggests a national multiplier of about 1.7 or above, larger than that found in most studies based on time series evidence. I conclude by offering suggestions for future research on cross-sectional multipliers.