Download This PDF is a selection from a published volume from... Economic Research Volume Title: NBER Macroeconomics Annual 2007, Volume 22

This PDF is a selection from a published volume from the National Bureau of
Economic Research
Volume Title: NBER Macroeconomics Annual 2007, Volume 22
Volume Author/Editor: Daron Acemoglu, Kenneth Rogoff and Michael
Woodford, editors
Volume Publisher: University of Chicago Press
Volume ISBN: 978-0-226-00202-6
Volume URL: http://www.nber.org/books/acem07-1
Conference Date: March 30-31, 2007
Publication Date: June 2008
Chapter Title: Discussion of chapter 3
Chapter Author: Daron Acemoglu, Kenneth Rogoff, Michael Woodford
Chapter URL: http://www.nber.org/chapters/c6419
Chapter pages in book: (p. 247 - 249)
Discussion
The discussion
ernment
focused
spending,
on the choice
identification
between
issues,
and
total and military
gov
the consequences
of im
plementation
lags.
out that not only was
Rick Mishkin
by pointing
began the discussion
the Korean War a big event, but itwas also the closest to a perfect ex
was
from that
Hence,
unanticipated.
completely
periment,
given that it
to keep the Korean War in the
itwould
be very important
viewpoint,
sample.
the use of overall government
defended
Acemoglu
spending
that if one views
rather than just defense
the
spending
by arguing
as instruments,
dummies
then
the
Ramey-Shapiro
right intervening
variable is not defense spending, but total spending. Valerie Ramey later
Daron
confirmed
used
that the original
total government
(1998) paper
Ramey-Shapiro
spending, with the defense dummy
had
indeed
variables
as
instruments.
uses more data,
out that the VAR method
also pointed
Acemoglu
in the dummy
it
is
whereas
variable
unclear
how to think
approach,
on
He
about "asymptotics
four observations."
concluded
by suggesting
a
the
narrative
reconciliation
between
potential
approach and the VAR
a source of variation
in spend
is exploiting
approach. The first approach
a
so
one
that
is
wealth
would
tend to
shock,
ing
causing
strictly negative
a
find negative
Perotti's approach
effect. Conversely,
includes spending
on education,
reasonable
frameworks
health, and so on, which most
as
to private consumption.
That source of
complementary
an
variation creates
increase in the marginal
of consumption,
propensity
and hence would
tend to result in an increase in consumption.
Perhaps,
would
model
are actually consistent with each other,
he offered, the two approaches
even without
into
the
econometric
there may be
details, although
going
other reasons why one approach might be preferred over the other.
248 Discussion
Michael
Woodford
reiterated
the basic questions
of the paper, par
in
to
Ricardo
Reis's
which
had implied that
response
tially
presentation,
a neoclassical
on what one
model
could yield any response depending
assumes about the policy rules. Woodford
out
at
that
least in the
pointed
are
some
baseline neoclassical
model
there
that
very simple predictions
are independent
of what one assumes
about the dynamics
of the fiscal
shock.
paper
model.
In particular, he argued,
the two key puzzles
that motivate
the
come from two static
in
neoclassical
relations
the
equilibrium
the marginal
First, on the firm side, the static relation between
product of labor and the real wage yields a relation between hours and
an increase in hours
a fiscal shock
the real wage. Obtaining
following
a lower
that leaves productivity
would
unchanged
imply
product wage.
rate of
the
household's
Second, in the representative
problem,
marginal
substitution
condition
between
hours, and the real wage,
consumption,
a
in the real wage would
reduction
up,
implies that with hours going
have to be associated with a decline
sized
the fact that these
in consumption.
Woodford
empha
on the predictions
two sign restrictions
of the
of the dynamics
of the shock to government
pur
are independent
chases, and are in fact the focus of the paper.
Valerie Ramey highlighted
the paper by Burnside,
model
and
Eichenbaum,
a
at
in
which
effect
of
defense
neoclas
looks
the
(2004),
spending
common New Key
sical framework with distortionary
taxes, whereas
that
still assume nondistortionary
nesian models
taxes, and suggested
Fisher
in this area.
is needed
investigation
on the choice
Michael Woodford
also commented
more
and overall
He
between
defense
that in earlier work
spending.
acknowledged
spending
on military
with
focused
Julio Rotemberg
(1992), they had entirely
to address concerns that government
spending may respond
spending,
in the economy. But, he argued, Perotti's ap
to the state of productivity
to address the endogeneity
issue through a differ
proach is attempting
even if
ent means, which
is the timing restriction. From this perspective,
one considers
which
of government
other components
may
spending,
an issue if one be
be correlated with productivity,
causality might not be
it.
lieves that the assumed
timing restrictions neutralize
to identification
issues, with Mark Gertler
to discrimi
about
the
impulse responses
using
echoing
Gertler's
models.
nate between
the neoclassical
and New Keynesian
concern stemmed
model
the
from the fact that just as in the neoclassical
The discussion
Reis's
then shifted
concerns
can be very sensitive
to the fiscal policy rule, in the New Key
responses
are
to the monetary
sensitive
nesian model
responses
policy rule. In fact,
249
Discussion
isNew Keynesian,
the policy of an effective cen
he argued, if the world
look like a real business
tral bank can make
the economy
cycle (RBC)
But the positive
difficult.
and that will make
identification
economy,
was that if one believes
in
that there are periods
spin to his comment
which
these rules change, then one can exploit that in the identification
in the impulse responses. Gertler concluded with
and look for changes
"a point on intellectual history," stressing that Timothy Cogley and Jim
in the
the ones to first notice the lack of persistence
Nason
(1995) were
models.
RBC
of
predictions
on variable choice by
sought to reconcile the debate
but de
that if all government
affects outcomes,
spending
suggesting
is exogenous,
then one should have defense spending be
fense spending
an instrument
one could in
for government
spending. Alternatively,
Olivier
Blanchard
in the VAR and look at the effects. The second point
was on the issue of implementation
lags. Blanchard
clude both variables
Blanchard
made
to take a
that in principle,
if one is willing
(2002) showed
stand on how long before the event takes place people
actually know
one
can
then
what will happen,
the issue by using
actually handle
as
next
for
this
measured
shocks
period. Blanchard also
spending
period
and Perotti
stressed differences
the VAR and dummy variable approaches.
between
First of all, the shocks of a VAR have different magnitudes
compared
with the binary value of a dummy. Second, different episodes have dif
cannot
ferent fiscal compositions
(spending versus tax revenues) which
be captured with a dummy
approach.
[The author was unable to be present and so was not able to respond
to the discussion.]