Emi Nakamura and Jon Steinsson: Fiscal Stimulus & the Open Economy Relative Multiplier: Noted for August 30, 2013

Emi Nakamura and Jon Steinsson: Fiscal Stimulus & the Open Economy Relative Multiplier:

When the U.S. embarks upon a military buildup, there is a systematic tendency for spending to increase more in some states than others…. We find that when relative spending in a state increases by 1 percent of GDP, relative state GDP rises by 1.5 percent… the “open economy relative multiplier”…. The closed economy aggregate multiplier is highly sensitive to how aggressively monetary and tax policy “lean against the wind” in response to a government spending shock…. Since the open economy relative multiplier focuses on relative changes in government spending and output, these aggregate factors are “differenced out”…. We show that our estimates are much more consistent with New Keynesian models in which “aggregate demand” shocks—-such as government spending shocks—-have potentially large effects on output than they are with the plain-vanilla Neoclassical model. In particular, our results suggest that government spending should have large output multipliers when the economy is in a liquidity trap