Survey
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Survey Methods in Macroeconomics Matthew Shapiro University of Michigan [email protected] Goals for course • Some recent, successful methods – Surveys, Narrative, Econometrics • Looking forward to dissertations – Shifts in policy and shocks to economy create opportunities for research – Use a variety of empirical methods – Link results to theoretical questions – Understand specific episodes Applications/Topics • Fiscal policy – Theory – Approches • Narrative • Survey • Econometrics • Great recession and financial crisis • Resources/topics for research Outline: Understanding fiscal stimulus • Theoretical considerations: – When should tax cuts and government spending be stimulative? – What do empirical findings tell us about validity of theories? Outline: Understanding fiscal stimulus • Recent empirical evidence – Evidence from narrative history • tax cuts (Romer/Romer) • military spending (Ramey/Shapiro) – Comparing with econometric approaches • Narrative versus VAR (Ramey) – Case study of 2008 rebates • Michigan Surveys (Sahm, Shapiro, Slemrod) • Consumer Expenditure Survey (Parker, et al) Theory: Neoclassical Benchmark Equilibrium output supply constrained For output to increase, fiscal stimulus to demand must also increase labor supply • Labor supply moved through wealth effects • Wealth effects typically small on net Literature Strict neoclassical model •Barro •Baxter and King (AER, 1993) New Keynesian model •Hall (BPEA, 2009) •Woodford (AEJ:Macro, 2011) [MAIN REFERENCE FOR LECTURE] Fiscal multiplier (following Woodford, 2011) u(C ) v (H ) t t 0 t Yt f (Ht ) Yt Ct Gt t Discounted utility: consumption and labor Production Adding up, Market clearing Fiscal multiplier (following Woodford, 2011) v (Ht ) Wt u(Ct ) Pt Wt f (Ht ) Pt v (Ht ) Wt f (Ht ) u(Ct ) Pt Household optimization Firm optimization Equilibrium Fiscal multiplier (following Woodford, 2011) v (Ht ) u(Ct ) f (Ht ) u(Yt Gt ) v (Yt ) Rearranging Substituting C, Y, and inverse labor demand: v (Y ) v (f 1(Y )) v v / f Fiscal multiplier (following Woodford, 2011) u dY dG u v Totally differentiating u Yu / u 0, v Yv / v 0 Utility curvature u dY 1 dG u v Labor supply elasticity and production function curvature Potential very small if labor supply relatively inelastic Fiscal multiplier • Lesson of neoclassical analysis – Multiplier bounded below one – Likely to be small • Taxes – In benchmark neoclassical model, timing of taxes irrelevant • Lump sum • Ricardian equivalence Taxes irrelevant Lump sum tax cut multiplier • Transfer from Ricardian consumers to non-Ricardian consumers – 1: Consumers generically non-Ricardian – 2: Fraction of consumers liquidity constrained • Lump sum tax cuts will have damped responses relative to purchases multiplier – Focus on MPC in empirical work critical – Analogous to “leakages” in textbook Tax cut multiplier • Tax cuts that effect rates of return to saving and work will have larger effects – Long-term incentive effects – Short-run timing effects v (Ht ) Wt (1 t ) f (Ht ) u(Ct ) Pt NeoKeynesian multiplier Markup: Wedge from imperfect competition u(Yt Gt ) v (Yt ) Pt price/cost markup Wt / f (Ht ) NeoKeynesian multiplier Markup and increased multiplier • Fiscal expansion reduces markup by increasing competition (Rotemberg and Woodford, 1992) • Stick prices: – Supply decisions based on ex ante demand – Marginal cost does not increase with fiscal stimulus Role of Monetary Policy Normal times • Level of monetary accommodation affects multipliers • “Leaning against wind” the presumption Zero lower bound • No increase in nominal interest rate • Real rate reduced though increased inflation expectations