Local government spending and the fiscal multiplier: evidence from Brazil

Available from: 
October 2013
Paper author(s): 
Benjamin Thompson (University of Michigan)
Diogo Guillen (Princeton University)
Breno Braga (University of Michigan)
Macroeconomics - Economic growth - Monetary Policy
Fiscal Policy - Public and Welfare Economics

In this study, we exploit a discontinuity in the assignment of federal transfers at the municipality level to estimate the effects of fiscal policy on local labor markets in Brazil. We find that the effects of government spending on income and employment are much smaller than those estimated in developed countries: specifically, we cannot reject the null hypothesis of negligible (zero) government multipliers. We explore potential explanations for why the estimated effects are so small and find evidence suggestive of corruption playing a role in the allocation of funds. When taking corruption into account, we find that the effects of government spending at the local level are positive and significant. Our results suggest implications for future fiscal policy in developing nations.


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Research section: 
Lacea 2013 annual meeting
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