A Depiction of “The Miracle of the Seagulls” from Mormon History

QUESTION

Miles, I greatly enjoy your blog. I am 3rd year econ phd with a burgeoning interest in the impact of fiscal policy and government expenditure during recessions. Much of the literature simply attempts to calculate a jobs or GDP multiplier, but there are many other impacts of fiscal policy. What are important costs and benefits of fiscal policy that you feel are understudied? Who are the winners and losers from stimulus expenditure? I have a particular interest in firm and worker outcomes. Thanks! – markcurti

ANSWER

The answer here is easy for me. There has been no formal modeling of my Federal Lines of Credit proposal in my second post

“Getting the Biggest Bang for the Buck in Fiscal Policy.”

 This is a serious proposal–and in my view an extremely important proposal–that deserves formal modeling, but I am not going to do that formal modeling myself. (Why don’t I do this myself? See on my CV at the sidebar the number of other research projects I have in progress–many more than the number of my publications!) So it definitely counts as understudied. Here again is the link to the full article that I have submitted to a professional economics journal laying out the proposal in some detail. I even have an NBER Working Paper by the same name that you can cite, though I recommend reading the one I link to rather than the NBER Working Paper. 

When I say “formal modeling,” I am thinking this is one place where a Dynamic Stochastic General Equilibrium (DSGE) model would be quite appropriate in order to get some sense of likely magnitudes. Since analyzing Federal Lines of Credit requires modeling borrowing constraints and heterogeneity, as well as modeling sticky prices so that aggregate demand matters for output, there would be plenty of chances to develop and show off technical skills. I would be truly delighted to have someone do this analysis. 

Since I think the corresponding National Lines of Credit are even more important for Europe than Federal Lines of Credit are for the United States, if you want to do something empirical, to me the key issue is measuring the degree of spillover in fiscal stimulus from one country in the Eurozone to another. Similarly, you could look at the degree of spillover in fiscal stimulus from one U.S. state to another given a state-level fiscal stimulus. However, in general, the amount of empirical precision available for empirical studies of fiscal policy is not great, so this may not be that promising in the end. In either case, DSGE modeling of fiscal spillovers from one Eurozone country to another or from one state to another could be useful. 

July 8, 2012 Update

For other readers, let me translate my statement “the amount of empirical precision available for empirical studies of fiscal policy is not great”:

Despite many claims, aside from military spending, there is not much evidence about the overall effects of short-run fiscal policy on the economy one way or another.  

I would be glad to have this claim contested, but I can say that I have seen a lot of economics seminars lately with empirical estimates of the effects of short-run fiscal policy that are all over the map. Valerie Ramey (who has done work on fiscal policy with my colleague Matthew Shapiro) is one of the experts on what evidence exists. Here again is what she had to say about a recent short-run fiscal policy paper by Brad Delong and Larry Summers:

Valerie’s Powerpoint file and Valerie’s writeup of her discussion. There is an active thread on Twitter from my tweeting the link to Valerie’s writeup and calling it devastating.

Now I am not so sure. There are many objections being voiced to Valerie’s discussion. Anyway, the twitter thread backs up the idea that it is hard to get definitive empirical evidence in this area. 

By the way, Mark, please leave a comment below giving some indication of your likelihood of pursuing this. If you definitely aren’t pursuing it, letting us know will reassure others that there isn’t too much competition on this research topic.