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Macroeconomic Frameworks: Reconciling Evidence and Model Predictions from Demand Shocks

Author

Listed:
  • Alan J. Auerbach
  • Yuriy Gorodnichenko
  • Daniel Murphy

Abstract

How do demand shocks affect the economy? We exploit detailed data on US defense spending to examine a large set of outcome variables in response to well-identified local demand shocks, jointly examining new outcomes (e.g., firm entry and housing rents) and other key macroeconomic outcomes and elasticities that previously have been estimated separately or in settings with weaker identification. We find that government spending crowds in employment, firm entry, private consumption, and labor productivity while also increasing local housing rents. To reconcile the evidence with theory, we study a model of economic slack.

Suggested Citation

  • Alan J. Auerbach & Yuriy Gorodnichenko & Daniel Murphy, 2024. "Macroeconomic Frameworks: Reconciling Evidence and Model Predictions from Demand Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(3), pages 190-229, July.
    • Handle: RePEc:aea:aejmac:v:16:y:2024:i:3:p:190-229
    DOI: 10.1257/mac.20210033
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    Cited by:

    1. Gonzalez, Alejandro, 2024. "Bargaining power, demand growth and the decline of the labor share," OSF Preprints 78kad, Center for Open Science.

    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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