Author Archives: Menzie Chinn

Tales from the Midwest (Macro Spring Meetings, That Is)

Program here. Here are a couple of papers I found of interest.

From the Empirical Macro session:


  • Output response to government spending: Evidence from new international military spending data,” By Viacheslav Sheremirov; Federal Reserve Bank of Boston, Sandra Spirovska; University of Wisconsin, Madison

    Using 25 years of military spending data from more than a hundred countries, this paper provides new evidence on the effect of government spending on output. Following a popular assumption that military spending is unlikely to respond to output at business-cycle frequencies—and exploiting variation in military spending of a significantly larger magnitude than in the previous literature based on U.S. data—we find that the pooled government spending multiplier is small: below 0.2. This estimate, however, masks substantial heterogeneity: the debt financed
    spending multiplier is larger and can be well above 1 if monetary policy is accommodative. The multiplier is especially large in recessions and when the government purchases durables. e also document substantial heterogeneity across countries with the spending multiplier larger in advanced economies and in countries with a fixed exchange rate. The output response to government spending persists for about two to three years. These findings suggest that the effectiveness of fiscal policy depends largely on the economic environment, policy implementation, and the central bank’s response, and that the small multipliers found in historical or pooled data are a poor guide to evaluating the effectiveness of a specific stimulus program.

From the Monetary Policy session:


  • “Has Globalization Changed the Business Cycle and the Monetary Policy Trade-offs?” by Enrique Martinez-Garcia; Federal Reserve Bank of Dallas

    No presentation/paper online, but the answer is “yes”.

Tomorrow, there’s the Sovereign Debt session:


  • Optimal Redistributive Policy in Debt Constrained Economies,” by Monica Tran Xuan; University of Minnesota

    This paper studies optimal taxation in an open economy subject to redistribution motive and long-run binding debt constraints. The debt constraints arise endogenously from the government’s limited commitment, and become relevant in the long run due to the impatience of the domestic agents. Marginal and lump-sum taxes are allowed to distribute resources across heterogeneous agents. The standard Ramsey results of labor tax smoothing and zero capital tax limit no long hold. The optimal labor tax decreases as the debt constraints bind, and eventually converges to a real limit. The optimal capital tax is positive in the long run. The effcient contract features front-loading redistribution and back-loading efficiency, allowing the economy to accumulate a large external debt position, and increase its borrowing capacity when the debt constraints bind. A numerical exercise of the model demonstrates that a higher redistribution motive leads to a higher labor tax rate during the unconstrained-debt periods, a lower labor tax limit, and a higher external debt accumulation over time.

  • “Sovereign Risk Premia and Corporate Balance Sheets,” by Steve Pak Yeung Wu; UW-Madison

  • Real Interest Rates and Productivity in Small Open Economies,” by Tommaso Monacelli; Università Bocconi and IGIER; Luca Sala; Universita’ Bocconi; Daniele Siena; Banque de France

    In emerging market economies (EMEs), capital inflows are associated to productivity booms. However, the experience of advanced small open economies (AEs), like the ones of the Euro Area periphery, points to the opposite, i.e., capital inflows lead to lower productivity, possibly due to capital misallocation. We measure capital flow shocks as (exogenous) variations in (world) real interest rates. We show that, in the data, the misallocation narrative fits the evidence only for AEs: lower real interest rates lead to lower productivity in AEs, whereas the opposite holds for EMEs. We build a business cycle model with firms’ heterogeneity, financial imperfections and endogenous productivity. The model combines a misallocation effect, stemming from capital inflows, with an original sin effect, whereby capital inflows, via a real exchange rate appreciation, affect the borrowing ability of the incumbent, marginally more productive firms. The estimation of the model reveals that a low trade elasticity combined with high (low) firms’ productivity disperions in EMEs (AEs) are crucial ingredients to account for the different effects of capital inflows across groups of countries. The relative balance of the misallocation and the original sin effect is able to simultaneously rationalize the evidence in both EMEs and AEs.

Semi-automatic Rifle Use and Mass Shooting Casualties, 1982M08-2018M04


Figure 1: Cumulative mass shooting fatalities from incidents where semi-automatic rifles used (blue), non-fatal injured (light blue), fatalities where other weapons (handguns, semi-automatic handguns, rifles, shotguns) used (red), non-fatal injured (pink), through April 2018. Light green denotes assault weapons ban. Orange denotes 2017M01-2018M04. Source: Mother Jones, accessed 5/18/2018, and author’s calculations.

The above graph does not incorporate the estimated 10 deaths and additional injuries incurred today in Santa Fe, TX.

Cumulative Mass Shooting Casualties since 2009M01, 2017M01

Thankfully, Mr. Trump in conjunction with the Republican controlled Congress have implemented policies to address this issue in manner supported by evidence-based research.


Figure 1: Cumulative fatalities from mass shootings since 2009M01 (blue), since 2017M01 (red), on a log scale. May observation assumes lower bound of 8 fatalities. Source: Mother Jones accessed 5/18, news accounts, author’s calculations.

It took 4-1/2 years from 2009M01 to match the number of fatalities that have been recorded in the 16 months since 2017M01.

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A Wisconsin Fixed Effect

Wisconsin’s unemployment rate has dropped to 2.8 percentage points in April. The national rate is 3.9 percentage points. Proof of Walkernomics success? Well, since on average Wisconsin’s unemployment rate is typically 0.9 percentage points below, the answer is “no”. Consider the Wisconsin and US unemployment rates.


Figure 1: Unemployment rate for United States (blue), for Wisconsin (red). NBER defined recession dates shaded gray; Walker administrations shaded orange. Source: BLS, DWD, NBER.

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How Many Times Have the 10y2y and 10y3m Spreads Concurrently Broken the 1% and 0.5% Thresholds w/o Subsequent Recession?

If one uses a three year window, it’s three times: February, 1986, May 1995, September 1997. Three other times, a recession follows.

The last time around — when people were saying “this time is different” — was May 2005. Inversion occurred in February 2006 (and in November 2006, skepticism of impending recession). The recession is dated by NBER as starting in December 2007.

For additional discussion of the implications of a flattening yield curve, see Michael Klein’s EconoFact article, and (for cross country empirics) Chinn and Kucko (2015).

The US Petroleum Trade Balance

As oil prices start heading up, the usual questions arise regarding the macro implications. One view is that with the revolution in tight oil production, the US will experience less of a negative impact than before. This conclusion relies on a set of assumptions, possibly including the US being substantially less dependent on oil imports. Is this true?


Figure 1: US petroleum trade balance (blue), and negative of US petroleum imports (red). NBER defined recession dates shaded gray. Source: BEA, 2018Q1 advance release, NBER, author’s calculations.

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