Working Paper: NBER ID: w21228
Authors: Nicola Fuchs-Schündeln; Tarek Alexander 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: natural experiments; macroeconomics; permanent income hypothesis; fiscal multiplier; economic growth
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 |
|---|---|
| natural experiments (C93) | effective in verifying assumptions of the permanent income hypothesis (D15) |
| natural experiments (C93) | consumption responds to unexpected income shocks (E21) |
| unexpected income shocks (G59) | consumption growth (E20) |
| natural experiments (C93) | quantify fiscal multiplier (E62) |
| government spending and tax policies (H59) | stimulate the economy (E65) |
| natural experiments (C93) | identify fundamental causes of economic growth (O49) |
| fundamental causes of economic growth (O49) | institutions and social structures (O43) |