Daniel P. Murphy

Category: Macroeconomics

  • Demand Stimulus as Social Policy

    with Alan J. Auerbach and Yuriy Gorodnichenko
    Forthcoming, Review of Economic Studies, Read

    Abstract

    We exploit a panel of city-level data with rich demographic information to estimate the distributional effects of Department of Defense spending and its effects on a range of social outcomes. The income generated by defense spending accrues predominantly to households without a bachelor’s degree. These households as well as Black households tend to disproportionately benefit from this spending. Defense spending also promotes a range of beneficial social outcomes that are often targeted by government programs, including reductions in poverty, divorce rates, disability rates, and mortality rates, as well as increases in homeownership, health insurance rates, and occupational prestige. We compare the effects of defense spending with the effects of general demand shocks and explore reasons for the differential effects of the shocks.

  • A Model of Expenditure Shocks

    with Jorge Miranda-Pinto, Eric R. Young, and Kieran James Walsh
    Journal of Monetary Economics, 154: 103807 Read

    Abstract

    We document four features of consumption and income microdata: (1) household-level consumption is as volatile as household income on average, (2) household-level consumption has a positive but small correlation with income, (3) many low-wealth households have marginal propensities to consume near zero, and (4) lagged high expenditure is associated with low contemporaneous spending propensities. Our interpretation is that household expenditure depends on time-varying consumption thresholds where marginal utility discontinuously increases. Our model with consumption thresholds matches the four facts better than does a standard model. Poor households in our model also exhibit “excess sensitivity” to anticipated income declines.

  • Government Debt Limits and Stabilization Policy

    with Eric R. Young
    IMF Economic Review, Read

    Abstract

    We evaluate alternative public debt management policies in light of constraints imposed by the effective lower bound on interest rates. Replacing the current limit on gross debt issued by the fiscal authority with a limit on consolidated debt of the government can ensure that output always reaches its potential, but it may permit excess government spending when the economy is away from the effective lower bound. The welfare-maximizing policy sets the gross debt limit to the level implied by Samuelson (1954), while the central bank finances government spending with money when the economy is at the effective lower bound.

  • 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.

  • Home Size, Residential Density, and Aggregate Demand

    Read

    Abstract

    This paper documents that smaller homes and denser neighborhoods are associated with higher household saving rates. This relationship is apparent within and across U.S. households, across countries, and over time in the U.S. The micro data indicate the importance of complementarity between housing and non-housing consumption. Incorporating complementarity into a macroeconomic model implies that denser countries with smaller homes have higher household savings rates, a lower natural rate of interest, and lower sensitivity of non-housing consumption to monetary policy. Furthermore, growth in the non-housing sector alongside stable home sizes is associated with a declining natural rate of interest. High density and small homes may contribute to Japan’s lost decade and persistent stagnation.

  • Saving constraints, inequality, and the credit market response to fiscal stimulus

    with Jorge Miranda-Pinto, Kieran James Walsh, Eric R. Young
    European Economic Review, 151, 104355, Read

    Abstract

    We document substantial heterogeneity in the interest rate response to fiscal stimulus (IRRF) across OECD economies. The IRRF is negative in half of the OECD countries, and it declines with income inequality. To interpret this evidence we develop a model in which moderately-low-income households take on debt to maintain a consumption threshold (effectively a saving constraint). Now burdened with debt, these households use additional income to deleverage. In more unequal economies with more saving-constrained households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate.

  • Fiscal multipliers in the COVID19 recession

    with Alan Auerbach, Yuriy Gorodnichenko, and Peter B. McCrory
    Journal of International Money and Finance, 126, 102669, Read

    Abstract

    In response to the record-breaking COVID19 recession, many governments have adopted unprecedented fiscal stimuli. While countercyclical fiscal policy is effective in fighting conventional recessions, little is known about the effectiveness of fiscal policy in the current environment with widespread shelter-in-place (“lockdown”) policies and the associated considerable limits on economic activity. Using detailed regional variation in economic conditions, lockdown policies, and U.S. government spending, we document that the effects of government spending were stronger during the peak of the pandemic recession, but only in cities that were not subject to strong stay-at-home orders. We examine mechanisms that can account for our evidence and place our findings in the context of other recent evidence from microdata.

  • 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.

  • Inequality, fiscal policy and COVID19 restrictions in a demand-determined economy

    with Alan J. Auerbach and Yuriy Gorodnichenko
    European Economic Review, 137, 103810, Read

    Abstract

    We evaluate the effects of inequality, fiscal policy, and COVID19 restrictions in a model of economic slack with potentially rigid capital operating costs. Rich households satiate their demand for goods/services (and consume an endowment on the margin), whereas poor households’ spending on goods/services is limited by their income (which in turn depends on spending by the rich and on fiscal transfers). The model implies that inequality has large negative effects on output, while also diminishing the effects of demand-side fiscal stimulus. COVID restrictions can reduce current-period GDP by more than is directly associated with the restrictions themselves when rigid capital costs induce firm exit. Higher inequality is associated with larger restriction multipliers. The effectiveness of fiscal policies depends on inequality and the joint distribution of capital operating costs and firm revenues. Furthermore, COVID19 restrictions can cause future inflation, as households tilt their expenditure toward the future.

  • Effects of Fiscal Policy on Credit Markets

    with Alan J. Auerbach and Yuriy Gorodnichenko
    AEA Papers and Proceedings, 110, 119-124, Read

    Abstract

    Credit markets typically freeze in recessions: access to credit declines, and the cost of credit increases. A conventional policy response is to rely on monetary tools to saturate financial markets with liquidity. Given limited space for monetary policy in the current economic conditions, we study how fiscal stimulus can influence local credit markets. Using rich geographical variation in US federal government contracts, we document that, in a local economy, interest rates on consumer loans decrease in response to an expansionary government spending shock.

  • 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.

  • Fiscal Stimulus and Consumer Debt 

    with Yuliya Demyanyk and Elena Loutskina
    The Review of Economics and Statistics, 101(4), 728–741, Read

    Abstract

    In the aftermath of the consumer debt–induced recession, policymakers have questioned whether fiscal stimulus is effective during periods of high consumer indebtedness. This study empirically investigates this question. Using detailed data on Department of Defense spending for the 2007–2009 period, we document that the open-economy relative fiscal multiplier is higher in geographies with higher consumer debt. The results suggest that in the short term (2007–2009), fiscal policy can mitigate the adverse effect of consumer (over)leverage on real economic output during a recession. We then exploit detailed microdata to show that both heterogeneous marginal propensities to consume and slack-driven economic mechanisms contribute to the debt-dependent multiplier.

  • Savings Policy and the Paradox of Thrift

    with Andrew Hayashi
    Yale Journal on Regulation, 34(3), 743-790, Read

    Abstract

    The debate among legal scholars about individuals’ failure to save enough for retirement adopts a “micro” perspective. It focuses on the causes and consequences of undersaving from the perspective of individuals and analyzes how legal interventions, such as tax subsidies and nudges, can best address individual saving mistakes. This debate depends on certain assumptions about how the macroeconomy operates. When these assumptions do not hold, neither do the implications of the micro analysis, turning the conventional analysis of undersaving on its head. In fact, in certain circumstances, saving imposes a negative externality. When this is true, what looks like undersaving at the individual level may constitute oversaving in the aggregate, and the private vice of overconsumption may in fact be a public virtue—the “paradox of thrift.” We adopt a macro perspective and argue for reforms of legal interventions designed to increase savings.

  • 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.

  • How can government spending stimulate consumption?

    Review of Economic Dynamics, 18(3), 551-574, Read

    Abstract

    Recent empirical work finds that government spending shocks can cause aggregate consumption to increase. This paper builds on the framework of imperfect information in Lucas (1972) and Lorenzoni (2009) to show how government spending can stimulate consumption. Owners of firms targeted by an increase in government spending perceive an increase in their permanent income relative to their future tax liabilities, while owners of firms not targeted remain unaware of the implicit increase in future tax liabilities, causing aggregate consumption to increase. I show that a testable implication of this model—namely that the value of firms should increase in response to government spending shocks, implying all else equal an increase in aggregate stock returns—is consistent with empirical evidence.