Transcript Household Response to the 2008 Tax Rebates: Survey

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