Regional Consumption Responses and the Aggregate Fiscal Multiplier.

The article investigates the effect of government spending on consumer spending using regional variation in the American Recovery and Reinvestment Act (ARRA) from 2009 to 2012. Empirical analysis of household-level retail and auto purchase data estimates that a $1 increase in county-level ARRA spending raises local non-durable consumer spending by $0.29 and auto spending by $0.09. These local multipliers are then translated into an aggregate fiscal multiplier using a novel multi-region, new Keynesian model featuring heterogeneous agents and incomplete markets, which predicts an aggregate non-durable consumption multiplier of 0.41—about twice the local multiplier due to trade linkages and monetary policy at the zero lower bound. The study finds that incomplete markets and household heterogeneity are key to generating positive local and aggregate consumption responses, and that monetary policy responsiveness and trade intensity significantly influence the size of fiscal multipliers.