Working Paper: NBER ID: w23968
Authors: Emi Nakamura; J. N. Steinsson
Abstract: This paper discusses empirical approaches macroeconomists use to answer questions like: What does monetary policy do? How large are the effects of fiscal stimulus? What caused the Great Recession? Why do some countries grow faster than others? Identification of causal effects plays two roles in this process. In certain cases, progress can be made using the direct approach of identifying plausibly exogenous variation in a policy and using this variation to assess the effect of the policy. However, external validity concerns limit what can be learned in this way. Carefully identified causal effects estimates can also be used as moments in a structural moment matching exercise. We use the term “identified moments” as a short-hand for “estimates of responses to identified structural shocks,” or what applied microeconomists would call “causal effects”. We argue that such identified moments are often powerful diagnostic tools for distinguishing between important classes of models (and thereby learning about the effects of policy). To illustrate these notions we discuss the growing use of cross-sectional evidence in macroeconomics and consider what the best existing evidence is on the effects of monetary policy.
Keywords: macroeconomics; monetary policy; fiscal stimulus; causal identification
JEL Codes: E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reductions in interest rates (E43) | confounded by other economic factors (F69) |
| identified moments (C41) | inform structural models in macroeconomics (E10) |
| reductions in interest rates (E43) | stimulate output (C67) |
| empirical estimates of the marginal propensity to consume from fiscal rebates (D12) | households respond significantly to fiscal measures (H31) |
| regional fiscal multiplier (R15) | insights into effectiveness of fiscal policy (E62) |