Evaluating Macroeconomic Stabilization Policy

The last couple of years have seen important changes in the design of macroeconomic stabilization policy: so-called "stimulus checks" have become an important part of the fiscal policy toolkit, and the Federal Reserve has moved to a new monetary policy framework. This research develops new methods to allow researchers to evaluate the likely impacts of such changes in fiscal and monetary stabilization policy design. The new methods combine structural macroeconomic modeling with a strong empirical grounding, leveraging both classical time-series as well as more recently available cross-sectional data. The results of this research promise to improve policy responses to macroeconomic crises, from high unemployment to high inflation.

This award funds three separate research projects on the evaluation of macroeconomic stabilization policy. The first project provides recommendations on how empirical macroeconomists should in practice estimate the causal effects of policy interventions. The research reviews a large menu of existing approaches and then compares their performance in a rich, empirically relevant setting. The second project shows how to combine empirical estimates of the effects of surprise policy interventions to predict what would happen if the systematic policy framework were to change. Importantly, the project does so in a way that respects the Lucas critique. The researchers use the method to evaluate how the U.S. economy would have evolved under alternative assumptions on macroeconomic policy design. The third project studies fiscal stimulus. The re-searchers argue that, if such stimulus is not accompanied by relatively quick future tax hikes, then the stimulus will instead "finance itself" through a mix of higher output (increasing the primary surplus) and higher inflation (eroding the real value of government debt), with the split governed by the tightness of supply constraints