Valid t-Ratio Inference for IV

By David S. Lee, Justin McCrary, Marcelo J. Moreira, and Jack Porter

American Economic Review, October 2022

In the single-IV model, researchers commonly rely on t-ratio-based inference, even though the literature has quantified its potentially severe large-sample distortions. Building on Stock and Yogo (2005), we introduce the tF critical valu...

Front Matter

American Economic Journal: Macroeconomics, October 2022

News Shocks under Financial Frictions

By Christoph Görtz, John D. Tsoukalas, and Francesco Zanetti

American Economic Journal: Macroeconomics, October 2022

We examine the dynamic effects of TFP news shocks in the context of frictions in financial markets. We document two new facts. First, a shock to future TFP generates a significant decline in credit spread indicators along with a robust improvement in cred...

Fiscal Rules and the Sovereign Default Premium

By Juan Carlos Hatchondo, Leonardo Martinez, and Francisco Roch

American Economic Journal: Macroeconomics, October 2022

We study fiscal rules using a sovereign default model. A debt-brake (spread-brake) rule imposes a ceiling on the fiscal deficit when the sovereign debt (spread) is above a threshold. For our benchmark calibration, similar gains can be achieved with the op...

Optimal Public Debt with Life Cycle Motives

By William B. Peterman and Erick Sager

American Economic Journal: Macroeconomics, October 2022

This paper determines optimal public debt in a life cycle model with incomplete markets that matches the empirically observed variation in consumption, labor, and savings. We find that public savings—not public debt—equal to 168 percent of output is o...

Learning on the Job and the Cost of Business Cycles

By Karl Walentin and Andreas Westermark

American Economic Journal: Macroeconomics, October 2022

We show that business cycles reduce welfare through a decrease in the average level of employment in a labor market search model with learning on the job and skill loss during unemployment. Empirically, unemployment and the job-finding rate are negatively...

Asymmetric Effects of Monetary Policy in Regional Housing Markets

By Knut Are Aastveit and André K. Anundsen

American Economic Journal: Macroeconomics, October 2022

The responsiveness of house prices to monetary policy shocks depends on the nature of the shock—expansionary versus contractionary—and on local housing supply elasticities. These findings are established using a panel of 263 US metropolitan areas. Exp...

Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy

By Taisuke Nakata and Sebastian Schmidt

American Economic Journal: Macroeconomics, October 2022

We study optimal time-consistent monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. Insights from widely studied fundamental-driven liquidity traps are not a...

Age Structure and the Impact of Monetary Policy

By John V. Leahy and Aditi Thapar

American Economic Journal: Macroeconomics, October 2022

We exploit cross-sectional variation in the response of US states to an identified monetary policy shock to study how the impact of monetary policy varies with the age structure of the population. We find that the economy's response is weaker the greater ...

Distortions and the Structure of the World Economy

By Lorenzo Caliendo, Fernando Parro, and Aleh Tsyvinski

American Economic Journal: Macroeconomics, October 2022

We model the world economy as one system of endogenous input-output relationships subject to frictions and study how the world's input-output structure and world's GDP change due to changes in frictions. We derive a sufficient statistic to identify fricti...

Mind the Gap! Stylized Dynamic Facts and Structural Models

By Fabio Canova and Filippo Ferroni

American Economic Journal: Macroeconomics, October 2022

We study what happens to identified shocks and to dynamic responses when the data generating process features q disturbances but q1 < q variables are used in an empirical model. Identified shocks are linear combinations of current and past valu...

Short-Term Planning, Monetary Policy, and Macroeconomic Persistence

By Christopher Gust, Edward Herbst, and David López-Salido

American Economic Journal: Macroeconomics, October 2022

We estimate a behavioral New Keynesian (NK) model in which households and firms plan over a finite horizon. The finite-horizon planning (FHP) model outperforms rational expectations versions of the NK model as well as other behavioral NK models. In the FH...

Monetary Policy and Liquidity Constraints: Evidence from the Euro Area

By Mattias Almgren, José-Elías Gallegos, John Kramer, and Ricardo Lima

American Economic Journal: Macroeconomics, October 2022

We quantify the relationship between the response of output to monetary policy shocks and the share of liquidity-constrained households. We do so in the context of the euro area, using a Local Projections Instrumental Variables estimation. We construct an...

How Wage Announcements Affect Job Search—A Field Experiment

By Michèle Belot, Philipp Kircher, and Paul Muller

American Economic Journal: Macroeconomics, October 2022

In a field experiment, we study how job seekers respond to posted wages by assigning wages randomly to pairs of otherwise similar vacancies in a large number of professions. Higher wages attract significantly more interest. Still, a nontrivial number of a...

Neo-Fisherian Policies and Liquidity Traps

By Florin O. Bilbiie

American Economic Journal: Macroeconomics, October 2022

Liquidity traps can be either fundamental or confidence-driven. In a simple, unified New Keynesian framework, I provide the analytical condition for the latter's prevalence: enough shock persistence and endogenous intertemporal amplification of future ("n...

Population Aging and Structural Transformation

By Javier Cravino, Andrei Levchenko, and Marco Rojas

American Economic Journal: Macroeconomics, October 2022

We quantify the role of population aging in the structural transformation process. Household-level data from the United States show that the fraction of expenditures devoted to services increases with household age. We use a shift-share decomposition and ...

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