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Regional Consumption Responses and the Aggregate Fiscal Multiplier

System Working Paper 18-11 | Published April 2, 2018

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Authors

Bill Dupor Federal Reserve Bank of St. Louis

Marios Karabarbounis Federal Reserve Bank of Richmond

Marianna Kudlyak Federal Reserve Bank of San Francisco

M. Saif Mehkari University of Richmond

Regional Consumption Responses and the Aggregate Fiscal Multiplier

Abstract

We use regional variation in the American Recovery and Reinvestment Act (2009-2012) to analyze the effect of government spending on consumer spending. Our consumption data come from household-level retail purchases in Nielsen and auto purchases from Equifax credit balances. We estimate that a $1 increase in county-level government spending increases consumer spending by $0.18. We translate the regional consumption responses to an aggregate fiscal multiplier using a multi-region, New Keynesian model with heterogeneous agents and incomplete markets. Our model successfully generates the estimated positive local multiplier, a result that distinguishes our incomplete markets model from models with complete markets. The aggregate consumption multiplier is 0.4, which implies an output multiplier higher than one. The aggregate consumption multiplier is almost twice the local estimate because trade linkages propagate government spending across regions.