Hand-to-Mouth Households and Fiscal Multipliers: An Empirical Investigation

Abstract

I examine the role of hand-to-mouth (HtM) households in the transmission of government spending. Using micro data, I first document substantial regional heterogeneity in the share of HtM households across U.S. states. Then I exploit regional variation in U.S. military procurement to find that local fiscal multipliers are negatively correlated with the share of wealthy HtM, inconsistent with the standard Keynesian theory. Also, these heterogeneous multipliers introduce a sizable bias in conventional estimates of the average local multiplier. Once corrected, the average multiplier falls below one, and an inflationary response that was absent in prior estimates re-emerges. Finally, by examining local responses to various aggregate shocks and using procurement contract data, I document new evidence on the transmission channels of military spending and argue that the negative relationship between local multipliers and the HtM share is driven by the distinct composition of military procurement.