TD NEREUS 06-2021
Raphael Fernandes and Eduardo Haddad
The debate about government spending multiplier, and the efficacy of fiscal policy in promoting economic growth was revitalized after the global financial crisis of the late 2000s. However, there is no consensus about the determinants of multipliers’ magnitude and nature, both at the national and regional level. The literature quantifying the local government multiplier is still limited, especially for developing economies. In this context, the objective of this paper is to analyze the impacts of Federal Government spending on the regional output and estimate the local multipliers for Brazilian states. Thus, we seek to answer which states would possess the highest multiplier to analyze its regional patterns, and in second instance, whether there is a trade-off between regional equity and national growth. We will achieve this objective through a computable general equilibrium analysis (CGE) for the Brazilian economy, and then compare with Input-Output estimates. In this sense, this paper offers another perspective on the multiplier effect: at first, by calculating for each state its Federal Government Spending Multiplier; secondly, it decomposes the total multiplier in its intraregional effect and the interregional effect. As a preview of results, we found that the multiplier is higher in more impoverished areas and sensitive to trade openness. Also, the IO multiplier is much higher due to the absence of price mechanisms. Furthermore, it suggests there would be no trade-off between mitigating regional disparities and fostering national growth, limited to a short-run closure without considering spending funding or the quality of public expenditures.