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Survey Methods in Macroeconomics. Matthew Shapiro University of Michigan shapiro@umich.edu. 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
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Survey Methods in Macroeconomics Matthew Shapiro University of Michigan shapiro@umich.edu
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) Discounted utility: consumption and labor Production Adding up, Market clearing
Fiscal multiplier(following Woodford, 2011) Household optimization Firm optimization Equilibrium
Fiscal multiplier(following Woodford, 2011) Rearranging Substituting C, Y, and inverse labor demand:
Fiscal multiplier(following Woodford, 2011) Totally differentiating Utility curvature 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
NeoKeynesian multiplier Markup: Wedge from imperfect competition
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