Local Government Spending Multipliers and Financial Distress: Evidence from Japanese Prefectures

We estimate local government spending multipliers using annual data for 47 Japanese prefectures during the 1990s. Our main findings are as follows: the average local government spending multiplier is positive and significantly different from zero but not larger than one; there are large and significant differences in the output effects of different types of government expenditures: transfers to firms have the highest multiplier, significantly larger than one, while transfers to households have the lowest multiplier, significantly below zero; firms' financial distress has a significant negative effect on the local government spending multiplier, in contrast to economic slack that has a significant positive effect.