State-level Federal Stimulus Funds and Economic Growth: The American Recovery and Reinvestment Act

The American Recovery and Reinvestment Act encompassed a substantial federally-funded state-level fiscal stimulus. The objectives of the Act were to increase employment and stimulate economic growth. While the level of the fiscal stimulus was potentially endogenous, a direct analysis of its effects leads to biased results. To circumvent this, the effect of the stimulus on economic growth was studied using instrumental variable estimation, since the distribution of a large part of the funds was based on conditions exogenous to the economic downturn. A cross-state two-stage least squares estimation procedure was used to quantify the effect of the stimulus on economic growth and to show that the robust significant positive effect of the stimulus amounts to a fiscal multiplier of almost 1.6. The results further show that the positive effect of stimulus spending remained significant until the end of the first term of the Obama presidency.