A tree and grassy knoll sit are in the foreground; the U.S. Capitol Building is in the background.

Working Paper

Partisanship and Fiscal Policy in Economic Unions: Evidence from U.S. States

Gerald A. Carlino,
Thorsten Drautzburg,
Robert P. Inman &
Nicholas Zarra

Revised: June 2023

WP 20-20/R – States disburse federal stimulus funds. We show that Democratic-led states spend more federal aid than Republican-led states, while Republican-led states have lower taxes. State partisanship thus shapes the effects of federal policy.

A previous version of this paper was published in June 2020.

Partisanship of state governors affects the efficacy of U.S. federal fiscal policy. Using close election data, we find partisan differences in the marginal propensity to spend federal intergovernmental transfers: Republican governors spend less than Democratic governors. Correspondingly, Republican-led states have lower debt, (delayed) lower taxes, and initially lower economic activity. A New Keynesian model of partisan states in a monetary union implies sizable aggregate effects: The intergovernmental transfer impact multiplier rises by 0.58 if Republican governors spend like Democratic governors, but due to delayed tax cuts, the long-run multiplier is higher with more Republican governors, generating an intertemporal policy trade-off.

Appendix

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A Narrative Approach to a Fiscal DSGE Model

Thorsten Drautzburg

April 2016

WP 16-11 – Structural DSGE models are used both for analyzing policy and the sources of business cycles. Conclusions based on full structural models are, however, potentially affected by misspecification.

Macroeconomics

Working Paper

Fiscal Stimulus in Economic Unions: What Role for States?

Gerald A. Carlino &
Robert P. Inman

November 2015

WP 15-41 – The Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy, and particularly the importance of state and local governments, to the center stage of macroeconomic policymaking.

The Economy

Working Paper

Partisan Conflict

Marina Azzimonti

June 2014

WP 14-19 – American politics have become extremely polarized in recent decades. This deep political divide has caused significant government dysfunction.