Affiliation:
1. Federal Reserve Bank of Philadelphia (email: )
2. University of Pennsylvania, Wharton and the NBER (email: )
3. New York University Stern (email: )
Abstract
Partisanship of state governors affects the efficacy of US federal fiscal policy. Using close election data, we find partisan differences in the marginal propensity to spend federal intergovernmental transfers: Republican governors spend less than Democratic governors. Correspondingly, Republican-led states have lower debt, (delayed) lower taxes, and initially lower economic activity. A New Keynesian model of partisan states in a monetary union implies sizable aggregate effects: The intergovernmental transfer impact multiplier rises by 0.58 if Republican governors spend like Democratic governors, but due to delayed tax cuts, the long-run multiplier is higher with more Republican governors, generating an intertemporal policy trade-off. (JEL D72, E12, E62, H71, H72, H74, H77)
Publisher
American Economic Association
Subject
Economics and Econometrics
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