Working Paper: NBER ID: w29558
Authors: Christian K. Wolf
Abstract: I give conditions under which changes in private spending are accommodated in general equilibrium exactly like changes in aggregate fiscal expenditure. Under such demand equivalence, researchers can use time series evidence on fiscal multipliers to recover the general equilibrium "missing intercept" of shocks to private spending identified in the cross section. I apply this method to deficit-financed stimulus checks, and find a) a large direct consumption spending response, and b) a fiscal multiplier of one and so a missing intercept close to zero. I also discuss the robustness of this aggregation approach to empirically plausible violations of demand equivalence.
Keywords: demand equivalence; fiscal multipliers; private spending; public expenditure; stimulus checks
JEL Codes: E20; E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Violations of demand equivalence (D10) | Upward bias in estimated general equilibrium effects (D58) |
| Changes in private spending (D12) | Changes in aggregate fiscal expenditure (E62) |
| Fiscal spending (E62) | Private consumption (D19) |
| Public demand shock (D12) | Aggregate consumption response (E21) |