Fiscal Policy in a Federal System

8 Pages Posted: 30 Dec 2010

See all articles by John F. McDonald

John F. McDonald

University of Illinois at Chicago

Date Written: December 1, 2010


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.

Keywords: Fiscal Policy, Federal System, Recession of 2007-2009

JEL Classification: E10, E60, H72

Suggested Citation

McDonald, John F., Fiscal Policy in a Federal System (December 1, 2010). Available at SSRN: or

John F. McDonald (Contact Author)

University of Illinois at Chicago ( email )

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