by Philadelphia Fed
An important component of the American Recovery and Reinvestment Act’s (ARRA’s) $796 billion proposed stimulus budget was $318 billion in fiscal assistance to state and local governments. The study reaches three conclusions. First, federal transfers to state and local governments are less stimulative than transfers to households and firms. Second, federal aid for welfare spending is more stimulative than is general purpose aid. Third, an estimated model of state government fiscal behavior provides a microeconomic foundation for the observed macroeconomic impacts of aid.