Federal Transfer Multipliers. Quasi-Experimental Evidence from Brazil

According to Brazilian law, federal transfers to municipal governments change discontinuously at numerous predetermined population thresholds. We employ a 'fuzzy' regression discontinuity design to identify the causal effect of federal transfers on local economic activity. The analysis points to local fiscal multipliers between 1.4 and 1.8 across a range of specifications that control for fixed municipal characteristics, national business cycle and monetary policy. In line with the predictions of a currency union model, transfers from the federal government tend to be more effective for municipalities in states less open to trade and in areas where financial constraints are likely to be tighter.