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.
