An Empirical Study to Assess the Effectiveness of U.S. Fiscal Policy

Abstract

As did many advanced economies, the U.S. economy experienced severe economic problems in 2008 and 2009, and the effects continue. In response to the global financial crisis, the U.S. government relied on a large fiscal stimulus package, known as the American Recovery and Reinvestment Act of 2009 (ARRA), to restore the economy. The governments of some U.S. states also increased their spending with the same purpose. As distinct from many recent studies, which evaluate the effectiveness of fiscal stimulus packages, using cross-country panel data sets, this study examines the effectiveness of these measures, using state level economic and budgetary data and data on ARRA contributions to each state. In relation to the effect of total ARRA spending on economic growth, I find statistically and economically significant positive results in both the state fixed effect and the ordinary least square models. However, when I break down the total ARRA spending into subcategories, while I find a stronger positive effect for the tax benefits, I get statistically significant negative coefficients on the entitlements and the state budget deficits in some regressions. I also find statistically insignificant results regarding the other ARRA subcategory, the contract, grants and loans.