Micro MPCs and Macro Counterfactuals: The Case of the 2008 Rebates /
Jacob Orchard, Valerie A. Ramey, Johannes F. Wieland.
- Cambridge, Mass. National Bureau of Economic Research 2023.
- 1 online resource: illustrations (black and white);
- NBER working paper series no. w31584 .
- Working Paper Series (National Bureau of Economic Research) no. w31584. .
August 2023.
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.
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Consumption • Saving • Wealth Forecasting and Simulation: Models and Applications Fiscal Policy • Modern Monetary Theory