How large is the provincial transfer multiplier for consumption: evidence from Canada

This paper investigates the impact of transfer payments to households in boosting private consumption spending across provinces in Canada. To estimate a causal relationship between transfer payments and consumption, we propose Universal Child Care Benefit payments across provinces in Canada as an instrument for transfer payments. Universal Child Care Benefit is a formula-based transfer where the total allocation for a province depends on the total number of eligible children in that province. Therefore, Universal Child Care Benefit payments can explain exogenous variation in transfer payments as these payments vary across provinces due to differences in demographic characteristics (distribution of a particular age group) rather than their economic conditions. The findings of this paper suggest that direct transfer payments to households can act as an effective policy instrument to boost local consumption spending in Canada. In particular, the paper finds that the local transfer multiplier of consumption in Canada is 0.47, indicating a robust impact of transfer payments on recipient households' consumption.