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A Cup Runneth Over: Fiscal Policy Spillovers from the 2009 Recovery Act

This paper studies the effects of interregional spillovers from the government spending component of the American Recovery and Reinvestment Act of 2009 (the Recovery Act). Using cross-county Census Journey to Work commuting data, we cluster U.S. counties into local labor markets, each of which we further partition into two sub-regions. We then compare differential labor market outcomes and Recovery Act spending at the regional and sub-regional levels using instrumental variables. Our instrument is the sum of spending by federal agencies not instructed to allocate Recovery Act funds according to the severity of local downturns. 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 $0.50 during the first two years following the act''''''''s passage. We find similar spillover effects when we replace the wage bill with employment as our measure of economic activity. The spillover effect occurs in the service sector, whereas the direct effect occurs in both the services and goods producing sector.

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