Daniel P. Murphy

Category: Economic Slack Under Flexible Prices

  • Macroeconomic frameworks: reconciling evidence and model predictions from demand shocks

    with Alan J. Auerbach and Yuriy Gorodnichenko
    American Economic Journal: Macroeconomics, 16(3), 190-229, Read

    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.

  • Government spending and interest rates

    with Kieran James Walsh
    Journal of International Money and Finance, 123, 102598, Read

    Abstract

    Most macroeconomic models imply that increases in government spending cause interest rates to rise, but empirical evidence from the U.S. generally fails to support this prediction. We propose a novel explanation for how government spending can have a zero or negative temporary effect on interest rates: the increased demand for credit associated with government spending is offset by an increase in the supply of credit due to higher aggregate income. We demonstrate this mechanism theoretically and provide evidence consistent with the model’s predictions.

  • Local Fiscal Multipliers and Fiscal Spillovers in the USA

    with Alan Auerbach and Yuriy Gorodnichenko
    IMF Economic Review, 68, 195-229, Read

    Abstract

    We estimate local fiscal multipliers and spillovers for the USA using a rich dataset based on the US Department of Defense contracts and a variety of outcome variables relating to income and employment. We find strong positive spillovers across locations and industries. Both backward linkages and general equilibrium effects (e.g., income multipliers) contribute to the positive spillovers. Geographical spillovers appear to dissipate fairly quickly with distance. Our evidence points to the relevance of Keynesian-type models that feature excess capacity.

  • Excess capacity in a fixed-cost economy

    European Economic Review, 19, 245-260, Read

    Abstract

    This paper proposes a new mechanism that can explain persistent economic slack. The theory shows that when producers face negligible marginal costs and desired spending is below the economy’s capacity, the economy features slack in equilibrium, even when prices are flexible and there are no other frictions. A heterogeneous household version of the model demonstrates how an economy can enter a capacity trap in response to a temporary negative demand shock: when demand by some consumers falls temporarily, other consumers’ permanent income (and hence their desired consumption) also falls. Since output is determined by demand, the permanent fall in desired consumption causes a permanent state of excess capacity.