The Missing Intercept: A Demand Equivalence Approach
American Economic Review · 2023 · Volume 113 · Issue 8
Abstract
I give conditions under which changes in private spending are accommodated in general equilibrium exactly like changes in aggregate fiscal expenditure. Under such demand equivalence, researchers can use time series evidence on fiscal multipliers to recover the general equilibrium "missing intercept" of shocks to private spending identified in the cross section. Through the lens of this theory, time series estimates of a fiscal multiplier around one suggest a missing intercept close to zero—an observation that I illustrate with an application to the 2008 tax rebates. I also discuss the robustness of this aggregation approach to plausible violations of demand equivalence.
Keywords
General Aggregative Models: Keynes, Keynesian, Post-Keynesian, Modern Monetary Theory, Macroeconomics: Consumption, Saving, Wealth, Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital, Aggregate Labor Productivity, Fiscal Policy, Household Finance: Household Saving, Borrowing, Debt, and Wealth, Personal Income and Other Nonbusiness Taxes and Subsidies, includes inheritance and gift taxes, Fiscal Policies and Behavior of Economic Agents: Household
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