Research

In response to the record-breaking COVID19 recession, many governments have adopted unprecedented fiscal stimuli. While countercyclical fiscal policy is effective in fighting conventional recessions, little is known about the effectiveness of fiscal policy in the current environment with widespread shelter-in-place (“lockdown”) policies and the associated considerable limits on economic activity. Using detailed regional variation in economic conditions, lockdown policies, and U.S. government spending, we document that the effects of government spending were stronger during the peak of the pandemic recession, but only in cities that were not subject to strong stay-at-home orders. We examine mechanisms that can account for our evidence and place our findings in the context of other recent evidence from microdata.

We use the high-frequency, decentralized implementation of stay-at-home (SAH) orders in the United States to disentangle the labor market effects of SAH orders from the general economic disruption wrought by the COVID-19 pandemic. We find that each week of SAH exposure increased a state’s weekly initial unemployment insurance (UI) claims by 1.9% of its employment level relative to other states. A back-of-the-envelope calculation implies that of the 17 million UI claims between March 14 and April 4, only 4 million were attributable to SAH orders. We present a currency union model to provide conditions for mapping this estimate to aggregate employment losses.

This article studies the effects of interregional spillovers from the American Recovery and Reinvestment Act of 2009 (the Recovery Act). Using cross-county commuting data, we cluster US counties into local labour markets, each of which we further partition into two subregions. We then compare differential labour market outcomes and Recovery Act spending at the regional and subregional levels. Among pairs of subregions, we find evidence of fiscal policy spillovers. According to our benchmark specification, 1 of Recovery Act spending in a subregion increases its own wage bill by 0.64 and increases the wage bill in its neighbouring subregion by $0.50 during the first two years following the Act’s passage. The spillover effect occurs in the service sector, whereas the direct effect occurs in both the services and goods-producing sector.

I generalize a textbook currency union model to incorporate trade in intermediates among labor markets in order to study the local, spillover, and aggregate effects of government spending. The spillover effects of government spending mediated by trade in intermediates represents a novel and understudied mechanism by which local fiscal multiplier estimates likely represent a lower bound on the aggregate, Zero Lower Bound (ZLB) fiscal multiplier. In this framework, there is both a local and a spillover (relative) multiplier of government spending. Theoretically, summing both multipliers together yields an approximate lower bound on the aggregate, ZLB fiscal multiplier. Using geographic variation in government spending under the 2009 Recovery Act and import-export linkages between states from the 2007 Commodity Flow Survey, I estimate a local relative multiplier of 1.46 and a spillover relative multiplier of 1.33. Adding both together yields an approximate lower bound on the aggregate, ZLB fiscal multiplier of 2.8, nearly doubling the lower bound implied by the local multiplier estimate alone. A sectoral decomposition of both estimated multipliers strongly corroborates the trade in intermediates spillover mechanism.

This paper presents a method to decompose the causal effect of government defense spending into: (i) a local (or direct) effect, and (ii) a spillover (or indirect) effect. Each effect is measured as a multiplier: the unit change in output of a one unit change in government spending. We apply this method to study the effect of U.S. defense spending on output using regional panel data. We estimate a positive local multiplier and a negative spillover multiplier. By construction, the sum of the local and spillover multipliers provides an estimate of the aggregate multiplier. The aggregate multiplier is close to zero and precisely estimated. We show that enlisting disaggregate data improves the precision of aggregate effect estimates, relative to using aggregate time series alone. Our paper provides a template for researchers to conduct inference about local, spillover and aggregate causal effects in a unified framework.

We consider a setting in which an impatient agent acquires payoff-relevant information about the true state of the world. The agent endogenously chooses when to stop learning, at which point an uninformed principal takes an action to maximize her own expected payoff. The agent’s preferences are biased relative to the principal’s, generating misalignment of expected payoffs. When communication is non-credible, the principal can only rely upon the agent’s endogenous stopping rule when strategically specifying her course of action. In the no-communication equilibrium, the agent adopts a one-sided stopping rule as a function of her posterior belief that is consistent with the principal’s pre-specified course of action at the time of stopping. When the principal has commitment power, relative to the full-communication equilibrium, the agent is always worse off; for intermediate values of prior beliefs, the principal is better off. The one-sided equilibrium stopping rule (and associated action) can switch discretely as a function of prior beliefs, generating dramatic regime changes for arbitrarily small changes in beliefs. When learning is initiated in the no-communication equilibrium there is a non-zero probability of indefinite delay, in which the agent never ceases learning and the principal never takes an action.