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Estimating the Economic Effects of US State and Local Fiscal Policy: A Synthetic Control Method Matched Regression Approach

Rickman, Dan S. and Wang, Hongbo (2022): Estimating the Economic Effects of US State and Local Fiscal Policy: A Synthetic Control Method Matched Regression Approach.

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Abstract

In this paper, we attempt to address the limitations of previous research to provide further guidance on US state and local fiscal policymaking. We implement the synthetic control method to create pairwise matches for states in subsequent regression analysis. Several economic indicators and principal component analysis are used to construct broader narratives of state economic performance and we provide updated evidence. We compare the results with those obtained from using neighbors as matches and from standard unmatched growth regressions. The matched regressions produce more statistically significant relationships between state and local fiscal variables and economic outcomes than do the standard growth regressions. Although the findings provide additional guidance for state and local fiscal policymakers, a lack of robustness across alternative economic indicators and heterogeneity of results confirm the elusiveness of recommendations on specific policies that are applicable in all circumstances.

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