NBER WORKING PAPER SERIES FISCAL STIMULUS IN A MONETARY UNION: EVIDENCE FROM U.S. REGIONS

We use rich historical data on military procurement spending across U.S. regions to estimate the effects of government spending in a monetary union. Aggregate military build-ups and drawdowns have differential effects across regions. We use this variation to estimate an "open economy relative multiplier" of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed economy aggregate multiplier. The closed economy aggregate multiplier is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind." In contrast, our open economy relative multiplier "differences out" these effects because different regions in the union share a common monetary and tax policy. Our estimates provide evidence in favor of models in which demand shocks can have large effects on output. Emi Nakamura Columbia Business School 3022 Broadway, Uris Hall 820 New York, NY 10027 and NBER enakamura@columbia.edu Jón Steinsson Department of Economics Columbia University 1026 International Affairs Building 420 West 118th Street New York, NY 10027 and NBER jsteinsson@columbia.edu

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