The Effect Of The American Recovery and Reinvestment Act On Investment And Macroeconomic indicators

This I.S uses state-level cross-sectional regression and a time series regression to evaluate the effectiveness of the American Reinvestment and Recovery Act (ARRA) impact on the economy. Specifically, we look at the effect the American Reinvestment and Recovery Act has on what its promise to deliver: the recovery of investment and other Keynesian variables such as GDP, unemployment, and wages. We found that the ARRA is consistent with its benefits. The cross-sectional regression shows that a 1% increase in ARRA fund leads to an increase of $31,830 in GDP level. The increase in GDP implies a large decrease in the unemployment rate using the assumption of Okun’s law. In addition, a 1% increase in Funds Awarded to each state causes wages to increase by 0.420%. The change in wage is significant as in the short run wages are inelastic and as employment increase, economic theory shows that wages should decrease or remain constant to offset higher employment. However, our time series result yields little significant result. This might happen as our sample is too small with only 12 observations. Overall, our cross-sectional result supports the effectiveness of the ARRA and demonstrates consistency with both economic theories and previous research