Fiscal Policy in a Federal System

The paper presents a Keynesian fiscal policy multiplier model with a federal system of government. The state and local government sector purchases over 60% of the goods and services purchased by the public sector, and receives transfer payments from the federal government. However, state and local governments must maintain balanced budgets. This requirement for a balanced budget implies that the fiscal multiplier is larger than it otherwise would be. The model is calibrated to represent the recession of 2007-2009