ESRI Discussion Paper Series No.348
Decomposing Local Fiscal Multipliers: Evidence from Japan

Taisuke Kameda
Cabinet Office, the Government of Japan
Ryoichi Namba
Chubu Region Institute for Social and Economic Research
Takayuki Tsuruga
Osaka University
Cabinet Office, the Government of Japan
Centre for Applied Macroeconomic Analysis

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


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  2. page1
    Abstract
  3. page2
    1. Introduction
  4. page5
    2. Local fiscal multipliers and the region-wide effect
  5. page9
    3. Data and the instruments
    1. page9
      3.1 Data
    2. page10
      3.2 Instrumenting government spending
      1. page10
        3.2.1 Institutional background
      2. page12
        3.2.2 Constructing the instruments
      3. page14
        3.2.3 First-stage regressions
  6. page15
    4. Main Results
    1. page15
      4.1 Estimates of fiscal multipliers and the geographic decomposition
    2. page18
      4.2 Expenditure decomposition
    3. page21
      4.3 Relationship to the national fiscal multiplier
  7. page22
    5. Robustness
    1. page22
      5.1 Adding control variables
    2. page23
      5.2 Dropping possible outliers
    3. page24
      5.3 Cumulative multipliers
  8. page25
    6. Conclusion
  9. page26
    A Appendix: Estimation equation and weighted average
    1. page26
      A.1 Derivation of (3)
    2. page28
      A.2 Derivation of (8)
  10. page29
    References
  11. page32
    Figures
    1. page32
      Figure 1: Regions in Japan and the pefectures strongely damaged by Great East Japan Earthquake in 2011
    2. page33
      Figure 2: Treasury disbursements per capita (constant 2005 JPY)
    3. page33
      Figure 3: Decomposition of the RFM into demand components
  12. page34
    Tables
    1. page34
      Table 1: Components of treasury disbursements used in the construction of instruments
    2. page35
      Table 2: First-stage regressions
    3. page36
      Table 3: Benchmark estimates of the local fiscal multipliers
    4. page37
      Table 4: Regressions of expenditure components
    5. page38
      Table 5: Robustness: Additional control variables
    6. page39
      Table 6: Robustness: Dropping possible outliers
    7. page40
      Table 7: Robustness: Different time horizons in cumulative fiscal multipliers
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