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The Missing Intercept: A Demand Equivalence Approach

  • Christian K. Wolf
American Economic Review
vol. 113, no. 8, August 2023
(pp. 2232-69)
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Abstract

I give conditions under which changes in private spending are accommodated in general equilibrium exactly like changes in aggregate fiscal expenditure. Under such demand equivalence, researchers can use time series evidence on fiscal multipliers to recover the general equilibrium "missing intercept" of shocks to private spending identified in the cross section. Through the lens of this theory, time series estimates of a fiscal multiplier around one suggest a missing intercept close to zero—an observation that I illustrate with an application to the 2008 tax rebates. I also discuss the robustness of this aggregation approach to plausible violations of demand equivalence.

Citation

Wolf, Christian K. 2023. "The Missing Intercept: A Demand Equivalence Approach." American Economic Review, 113 (8): 2232-69. DOI: 10.1257/aer.20211751

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E21 Macroeconomics: Consumption; Saving; Wealth
  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E62 Fiscal Policy
  • G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
  • H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
  • H31 Fiscal Policies and Behavior of Economic Agents: Household