Johannes Wieland

Macroeconomics has increasingly adopted tools from the applied micro “credibility revolution” to estimate micro parameters that can inform macro questions. In this paper, we argue that researchers should take advantage of this confluence of micro and macro to take the credibility revolution one step further. We argue that researchers should assess the plausibility of the micro estimates and macro models by constructing macro counterfactuals for historical periods and comparing these counterfactuals with reasonable benchmarks. We illustrate this approach by conducting a case study of the 2001 U.S. tax rebates, as well as briefly summarizing two previous applications of the methodology. In the 2001 rebate case, we calibrate a two-good, two-agent New Keynesian model with the leading estimates of the household marginal propensity to consume (MPC) out of the rebates to construct a counterfactual path for nondurable consumption. The counterfactual path implies that without the tax rebate nondurable consumption spending would have fallen dramatically in the late summer and fall of 2001. Using forecasting regressions and other evidence, we argue that this counterfactual is implausible. When we investigate the source of the discrepancy, we find that the leading MPC estimates are not representative of the response of total consumption.

In the standard new Keynesian model the government spending multiplier under constant, zero nominal interest rates can be large and positive, or large and negative. Small changes in fiscal policy discontinuously switch the multiplier from one case to the other. This paper shows that this discontinuity occurs because the standard minimum state variable solution switches between two equilibrium selection rules. Using a consistent equilibrium selection rule, government spending multipliers vary continuously with the fiscal experiment. Thus, government spending multipliers may be much less sensitive to the design of fiscal policy than implied by existing work.

Government spending multipliers under constant, zero nominal interest rates can be either large or small in the standard new Keynesian model, which previous work attributed to differences in the cause and severity of the zero lower bound. This paper shows that the government spending multiplier under constant, zero nominal interest rates is not state-dependent (in the linearized model) or only minimally so (in the nonlinear model). Instead, the fiscal experiment is an important determinant of the government spending multiplier. Previous work has reached different conclusions because it simultaneously changed the zero lower bound experiment together with the fiscal experiment.

Can fiscal policy be effective in an open economy with flexible exchange rates? Standard open economy models suggest that the open economy fiscal multiplier is small when exchange rates are flexible. This paper reassesses this premise by explicitly incorporating the zero lower bound (ZLB) on nominal interest rates in a small open economy New Keynesian model. It finds (1) when the ZLB binds and uncovered interest rate parity (UIP) holds, then the open economy fiscal multiplier is larger than 1 and bigger than the closed economy fiscal multiplier, (2) these conclusions can be reversed given significant violations of UIP, and (3) for estimated departures from UIP, the open economy fiscal multiplier at the ZLB is above 1 but smaller than the closed economy fiscal multiplier.

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 macro 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 mostly recovered 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 using the CEX data than the previous literature. We also show that realistic 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

We compare survey-based measures of work from home (WFH) in the cross section. While the surveys differ in how comprehensively they measure WFH, they are highly correlated in the cross section of US states, suggesting that they will yield similar causal effects. Researchers should carefully consider the trade-off between how comprehensively WFH is measured and measurement error, with the American Community Survey well suited for low levels of aggregation and the Survey of Working Arrangements and Attitudes and Real-Time Population Survey well suited to measuring distinct types of WFH. We also document that the experimental 2020 ACS replicate weights produce errors that are too small.

We study the monetary transmission mechanism in a quantitative fixed-cost model of durable goods demand. We show that aggregate demand is substantially more sensitive to contemporaneous interest rates than to forward guidance about future interest rates. Reducing the real interest rate one year from now increases output by only 41 percent as much as reducing the real interest rate today. The power of forward guidance declines further at longer horizons. We show analytically and quantitatively that this result is driven by the sensitivity of the extensive margin of durable adjustment to the contemporaneous user cost.

The prevailing neo-Wicksellian view holds that the central bank’s objective is to track the natural rate of interest (r*), which itself is largely exogenous to monetary policy. We challenge this view using a fixed-cost model of durable consumption demand, in which expansionary monetary policy prompts households to accelerate purchases of durable goods. This yields an intertemporal trade-off in aggregate demand as encouraging households to increase durable holdings today leaves fewer households acquiring durables going forward. Interest rates must be kept low to support demand going forward, so accommodative monetary policy today reduces r* in the future. We show that this mechanism is quantitatively important in explaining the persistently low level of real interest rates and r* after the Great Recession.

We argue that falling farm product prices, incomes, and spending may explain 10–30 percent of the 1930 U.S. output decline. Crop prices collapsed, reducing farmers’ incomes. And across U.S. states and Ohio counties, auto sales fell most in crop-growing areas. The large spending response may be explained by farmers’ indebtedness. Reasonable assumptions about the marginal propensity to spend of farmers relative to nonfarmers and the pass-through of farm prices to retail prices imply that the collapse of farm product prices in 1930 was a powerful propagation mechanism worsening the Depression.

This chapter provides an overview of Abenomics’ effects on financial markets and the real economy, with a focus on the effect of monetary policy. While many financial and real economic indicators showed success, consumption growth was sluggish. Household-level data from the Family Income and Expenditure Survey suggest that this is in part because monetary policy did not have the predicted expansionary effect on household consumption, even for those households expected to benefit most.

We revisit an old question: does industry labor reallocation affect the business cycle? Our empirical methodology exploits variation in a local labor market’s exposure to industry reallocation on the basis of the area’s initial industry composition and national industry employment trends for identification. Applied to confidential employment data over 1980–2014, we find sharp evidence of reallocation contributing to higher local area unemployment if it occurs during a national recession but little difference in outcomes during an expansion. A multiarea, multisector search-and-matching model with imperfect mobility across industries and downward nominal wage rigidity can reproduce these cross-sectional patterns.

We propose a novel mechanism, “financial dampening,” whereby loan retrenchment by banks attenuates the effectiveness of monetary policy. The theory unifies an endogenous supply of illiquid local loans and risk sharing among subsidiaries of bank holding companies (BHCs). We derive an instrumental variable (IV) strategy that separates supply-driven loan retrenchment from local loan demand by exploiting linkages through BHC internal capital markets across spatially separate BHC member banks. We estimate that retrenching banks increase loan supply substantially less in response to exogenous monetary policy rate reductions. This relative decline has persistent effects on local employment and thus provides a rationale for slow recoveries from financial distress.

Household spending in Japan rose less during Abenomics than hoped. We explore to what extent this is explained by Japanese housing market institutions. These institutions meant little pass-through of lower long-term interest rates to rates paid on the mortgages of existing homeowners. Consistent with the small mortgage interest rate response, microdata from the Family Income and Expenditure Survey show no evidence that homeowners with mortgages increased consumption relative to homeowners without mortgages or relative to renters.

The standard new Keynesian model predicts that economies behave differently at the zero lower bound: completely wasteful government spending or forward guidance is very stimulative, and capital destruction or oil supply shocks are expansionary. I provide empirical evidence on this prediction and find it wanting: The Great East Japan Earthquake and oil supply shocks are contractionary at the zero lower bound. Modifications of the model that are consistent with this evidence also overturn other unusual policy predictions, such as large fiscal multipliers. My results suggest that many of the usual rules of economics continue to hold at zero nominal interest rates.

From March to July 1933, US industrial production rose 57 percent. We show that an important source of recovery was the effect of dollar devaluation on farm prices, incomes, and consumption. Devaluation immediately raised traded crop prices, and auto sales grew more rapidly in states and counties most exposed to these price increases. The response was amplified in counties with more severe farm debt burdens. For plausible assumptions about farmers’ relative MPC, the incidence of higher farm prices, and the aggregate multiplier, this redistribution to farmers accounted for a substantial portion of spring 1933 growth. This farm channel thus provides an example of how the distributional consequences of macroeconomic policies can have large aggregate effects. That recovery in 1933 benefited from redistribution to farmers suggests an important limitation to the use of 1933 as a guide to the effects of monetary regime changes in other circumstances.

The effects of supply-side policies in depressed economies are controversial. We shed light on this debate using evidence from France in the 1930s. In 1936, France departed from the gold standard and implemented mandatory wage increases and hours restrictions. Deflation ended but output stagnated. We present time-series and cross-sectional evidence that these supply-side policies, in particular the 40-hour law, contributed to French stagflation. These results are inconsistent both with the standard one-sector New Keynesian model and with a medium scale, multisector model calibrated to match our cross-sectional estimates. We conclude that the New Keynesian model is a poor guide to the effects of supply-side shocks in depressed economies.

Countries rarely hit the zero lower bound (ZLB) on interest rates, but when they do, these episodes tend to be very long-lived. These two features are difficult to incorporate jointly into macroeconomic models using typical representations of shock processes. We introduce a regime-switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. We discuss what different calibrations of this model imply for optimal inflation rates.

We review the recent performance of the Japanese economy under Abenomics, the set of economic policies begun by Prime Minister Shinzo Abe in 2012. We find that in 2014, Abenomics, and in particular expansionary monetary policy, continued to weaken the yen and raise stock prices. It also continued to generate positive inflation, though neither actual nor expected inflation is yet 2 percent. The real effects of Abenomics have been modest. Performance would have been better if not for two puzzles: The response of net exports to the weak yen was small, and there is little evidence that expansionary monetary policy had large effects on consumption.

In early 2013, Japan enacted a monetary regime change. The Bank of Japan set a 2 percent inflation target and specified concrete actions to achieve this goal by 2015. In 2013, Shinzo Abe’s government supported this change with fiscal policy and planned structural reforms. Together with the Bank of Japan’s aggressive monetary easing, this policy package is known as “Abenomics.” We show that Abenomics ended deflation in 2013 and raised long-run inflation expectations. Our estimates suggest that Abenomics also raised 2013 output growth by 0.9 to 1.8 percentage points. Monetary policy alone accounted for up to a percentage point of growth, largely through positive effects on consumption. In both the medium and the long run, Abenomics will likely continue to be stimulative. However, the size of this effect, while highly uncertain, thus far appears likely to fall short of Japan’s large output gap. In part this is because the Bank of Japan’s 2 percent inflation target is not yet fully credible. We conclude by outlining a way to interpret future data releases in light of our results.

We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infrequent episodes at the zero lower bound, the optimal inflation rate is low, typically <2% even after considering a variety of extensions, including optimal stabilization policy, price indexation, endogenous and state-dependent price stickiness, capital formation, model uncertainty, and downward nominal wage rigidities. On the normative side, price-level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability. These results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero bound episodes.