Working Paper: NBER ID: w31584
Authors: Jacob Orchard; Valerie A. Ramey; Johannes F. Wieland
Abstract: We present evidence that the high estimated MPCs from the leading household studies result in implausible macroeconomic counterfactuals. Using the 2008 tax rebate as a case study, we calibrate a standard medium-scale New Keynesian model with the estimated micro MPCs to construct counterfactual macroeconomic consumption paths in the absence of a rebate. The counterfactual paths imply that consumption expenditures would have plummeted in spring and summer 2008 and then recovered when Lehman Brothers failed in September 2008. We use narratives and forecasts to argue that these paths are implausible. We then show that standard two-way fixed effect estimates of the micro MPCs are upward biased. When we correct for the biases, we estimate smaller micro MPCs than the previous literature. We also show that reasonable modifications of the model result in general equilibrium forces that dampen rather than amplify micro MPCs. The combination of smaller micro MPCs and dampening general equilibrium forces implies general equilibrium consumption multipliers that are below 0.2.
Keywords: marginal propensity to consume; 2008 tax rebate; New Keynesian model; macroeconomic counterfactuals
JEL Codes: E21; E27; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Upward biases in micro MPC estimates (C51) | modest actual stimulus effect of the rebate (E62) |
| Micro MPCs dampened by general equilibrium forces (D59) | general equilibrium consumption multipliers below 0.2 (E21) |
| Correction of upward biases in micro MPC estimates (C51) | lower MPC estimates (from 0.5 to 0.3 for the full sample) (E19) |
| High estimated MPCs from household studies (D10) | implausible macroeconomic counterfactuals regarding consumption paths during 2008 (E21) |