"We do not have a good measure of the effects of fiscal policy in a recession because the methods that we use to estimate the effects of fiscal policy — both those using the observed outcomes following different policies in aggregate data and those studying counterfactuals in fitted model economies -- almost entirely ignore the state of the economy and estimate 'the' government multiplier, which

**is presumably a weighted average of the one we care about — the multiplier in a recession — and one we care less about — the multiplier in an expansion**. Notable exceptions to this general claim suggest this difference is potentially large."

His solution is a more careful look at general equilibrium effects. This is similar to my response to the Conley-Dupor paper, where I suggest that some sense of the magnitude of interstate trade would help us understand exactly what the Conley-Dupor results are telling us. This also smacks of Old Keynesian econometrics to me: identify all the micro-reaction components (marginal propensities to consume, import, etc.) and then slap it all together to get a rough estimate of a fiscal multiplier.

Andrew Bossie advocated a mixed-methods approach to multipliers, and to a certain extent I agree. We can't just embrace all clearly biased estimators and call that "mixed methods", but we can take weighted averages of multipliers like Barro's and Romer's, and compare that to cross-national studies, and studies that build a multiplier up from its constituent parts, etc. I just don't like the idea of taking an estimator we know is going to be biased - like these cross-state studies - and throwing them into the pot, just assuming that the average that we get out is going to be useful.

Parker suggests: "Microeconomic estimates of the partial-equilibrium causal effects of a policy can

**discipline the causal channels**inherent in any DSGE model of the general equilibrium effects of policy. Microeconomic studies can also provide measures of the dependence of the effects of a policy on the states of different agents which is a key component of the dependence of the general-equilibrium effects of fiscal policy on the state of the economy." It sounds like calibrating a DSGE model instead of the traditional calibration of an Old Keynesian model.

To clarify a little. I prefer "nonparametric" and other techniques that estimate things other than the mean effect. I'm a big fan of quantile regressions.

ReplyDeleteMy mixed-methods approach is definitely not to look for a mean among studies but rather to approach the whole thing less formally and think about things in a "general sense" since I don't think econometrics really produces capital T truth anyway.

Also, have you seen this paper? It's an example of trying to estimate fiscal policy effects that isn't simply a mean effect. It's in a framework I think you are more comfortable with:

http://www.voxeu.org/index.php?q=node/5462