Working Paper: CEPR ID: DP10628
Authors: Nicola Fuchs-Schundeln; Tarek Hassan
Abstract: A growing literature relies on natural experiments to establish causal effects in macroeconomics. In diverse applications, natural experiments have been used to verify underlying assumptions of conventional models, quantify specific model parameters, and identify mechanisms that have major effects on macroeconomic quantities but are absent from conventional models. We discuss and compare the use of natural experiments across these different applications and summarize what they have taught us about such diverse subjects as the validity of the Permanent Income Hypothesis, the size of the fiscal multiplier, and about the effects of institutions, social structure, and culture on economic growth. We also outline challenges for future work in each of these fields, give guidance for identifying useful natural experiments, and discuss the strengths and weaknesses of the approach.
Keywords: Civic Capital; Fiscal Multiplier; Institutions; Multiple Equilibria; Networks; Permanent Income Hypothesis; Social Structure; Social Ties and Trust
JEL Codes: C1; C9; E21; E62; H31; O11; O14; O43; O50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Permanent Income Hypothesis (D15) | Households Adjust Consumption (D10) |
| Unexpected Income Shocks (G59) | Consumption Increase (E21) |
| Changes in Fiscal Policy (E62) | GDP (E20) |
| German Reunification (F55) | Consumption Behavior (D10) |
| Lower Initial Wealth Levels (G59) | Higher Saving Rates (D14) |
| Liquidity Constraints (E41) | Consumption Responses (D12) |