Another IV multiplier paper

Robert Vienneau shares a job market paper by David Shoag (Harvard). It's an interesting approach - Shoag uses windfall returns on state pension funds to instrument for government spending. This is similar in spirit to Romer and Romer's (2010) discussion of tax increases to reduce inherited budget deficits as exogenous to current macroeconomic conditions, except in the other direction. In this paper, it's windfall returns to pension funds that change spending
behavior.

The multiplier he gets is very large - 2.12 - and he suggests it's robust to a variety of specifications. This is quite surprising. For one thing, the multiplier itself seems too big even if we had a well identified estimate. But it's particularly big for interstate estimates, which ought to bias multiplier estimates downward for reasons I've discussed on here before. Shoag talks about certain frictions as playing a role in the result.

UPDATE: See Andrew's comment below. One of the things that puzzles me most about the paper is the instrument itself. Shoag writes "This paper’s research design can be clarified by the following thought experiment. Suppose New Hampshire’s retirement system outperforms Tennessee’s system after controlling for asset allocation. This performance is not due to the relative economic conditions in New Hampshire and Tennessee. Moreover, this excess return is presumably not expected ahead of time, or Tennessee would have altered its investment strategy. In the years after this outperformance, however, New Hampshire will have a smaller actuariallyrequired contribution to its pension plan and more resources available for government purchases. This paper estimates the effect of this randomly assigned spending on income and employment."

The bolded sentence confuses me. It would have thought strong pension fund performance would be associated with relative economic position. I don't know all that much about state pensions, but it would certainly seem to explain the large multiplier (what we usually think of as a negative endogeneity bias for fiscal multipliers is - because of the choice of instrument here - a positive bias).

So I'm skeptical of this paper, but my disclaimer is I've only read the first section and I'm always a grump when it comes to state-level analyses of fiscal multipliers. What do you think?

Does anyone know of any other interesting multiplier instrument papers?


UPDATE 2: Also, I meant to mention a recent paper by Arnold Kling in the new issue of Critical Review on all this called "Macroeconometrics: the Science of Hubris". He does a good job clearly explaining the issues I've been talking about, but he's a lot more skeptical and nihilistic than I am about it all. He's like the Ed Leamer of the macro side of things, and while I share his understanding of the issues I don't quite share his pessimism about what we've come up with.