Macroeconomic Frameworks: Reconciling Evidence and Model Predictions from Demand Shocks

• DOI: 10.1257/mac.20210033
• Publication Date: 2024-06-28T12:31:41Z
• Authors: Alan J. Auerbach; Yuriy Gorodnichenko; Daniel Murphy
• Keywords: 0502 economics and business; 05 social sciences

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. (JEL E12, E21, E24, E25, H56, L11, R31)