ESRI Discussion Paper Series No.348 Decomposing Local Fiscal Multipliers: Evidence from Japan
Abstract
Recent studies on fiscal policy use the cross-sectional data and estimate local fiscal multipliers along with the spillover. This paper estimates local fiscal multipliers, using the Japanese prefectural data comparable to the national accounts. We estimate local fiscal multiplier on output to be 1.7 at the regional level. This regional fiscal multiplier consists of the prefecture-specific components and the component common across prefectures within the same region, and we interpret the latter as the region-wide effect. Converting the latter into the spillover, we find that the spillover is positive and small in size. We decompose the regional fiscal multiplier on output into multipliers on expenditure components. The regional fiscal multiplier on absorption exceeds 2.0, because of the crowding-in effect in consumption and investment. Moreover, we find that the spillover to absorption is considerable in contrast to the spillover to output.
JEL Classification: E62, R12, R50
Keywords: Fiscal stimulus, spillover, geographic cross-sectional fiscal multiplier
Structure of the whole text(PDF-Format 1 File)
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page1Abstract
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page21. Introduction
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page52. Local fiscal multipliers and the region-wide effect
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page93. Data and the instruments
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page93.1 Data
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page103.2 Instrumenting government spending
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page103.2.1 Institutional background
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page123.2.2 Constructing the instruments
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page143.2.3 First-stage regressions
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page154. Main Results
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page154.1 Estimates of fiscal multipliers and the geographic decomposition
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page184.2 Expenditure decomposition
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page214.3 Relationship to the national fiscal multiplier
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page225. Robustness
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page225.1 Adding control variables
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page235.2 Dropping possible outliers
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page245.3 Cumulative multipliers
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page256. Conclusion
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page26A Appendix: Estimation equation and weighted average
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page26A.1 Derivation of (3)
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page28A.2 Derivation of (8)
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page29References
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page32Figures
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page32Figure 1: Regions in Japan and the pefectures strongely damaged by Great East Japan Earthquake in 2011
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page33Figure 2: Treasury disbursements per capita (constant 2005 JPY)
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page33Figure 3: Decomposition of the RFM into demand components
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page34Tables
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page34Table 1: Components of treasury disbursements used in the construction of instruments
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page35Table 2: First-stage regressions
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page36Table 3: Benchmark estimates of the local fiscal multipliers
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page37Table 4: Regressions of expenditure components
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page38Table 5: Robustness: Additional control variables
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page39Table 6: Robustness: Dropping possible outliers
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page40Table 7: Robustness: Different time horizons in cumulative fiscal multipliers
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