Estimating the size of the multiplier is difficult because it is hard to sort out the many things that are likely to be changing when a government decides to increase its spending. However, a recent paper found a novel way to sort out the various effects.

We have focused on the national multiplier. How much does national GDP rise when the national government increases spending? Economists and policy makers are also interested in the effects of stimuli at the local or regional level.

In general, we expect these multipliers to be less than national multipliers: If the governor of New York increases government spending in the state, some of that increase will likely spill over to New Jersey and other states. But exactly how big are these multipliers in practice?

Several economists working with Italian data had a novel approach to estimating regional multipliers in Italy.1 In the 1990s the Italian national government passed a law to try to control Mafia–led corruption in local governments. The law stated that when Mafia involvement was found in the city council in an area, all elected officials would be fired, to be replaced by three commissioners appointed by the national government. This change in decision making had a large effect on reducing public spending in the area as a result of the disruption.

On average, replacement of the council members reduced spending by 20 percent. Since the Mafia’s involvement varied considerably by region for historical reasons, this law had differential effects across regions, and those regional differences could be used to identify the size of the local multiplier. The results? Regional multipliers in the range of 1.5 to 2. Interestingly, work in the United States at the state level found similar magnitudes for the multiplier, using quite different methods.

Questions

Multipliers also vary across countries. What factors do you think determine these differences?

Transcribed Image Text:

{}