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Title: A Semi-Structural Methodology for Policy Counterfactuals and an Application to Fiscal Unions

Citation Type: Miscellaneous

Publication Year: 2015

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Abstract: I propose a methodology to conduct counterfactual analysis in a way that is robust to specific assumptions about primitives of linear models of dynamic stochastic economies. First, I show how to identify a set of models that yield the same counterfactual equilibrium after a policy change by imposing restrictions directly on equilibrium equations. Second, I describe how to construct this counterfactual equilibrium using data under a benchmark policy. This allows obtaining quantitative predictions with respect to policy changes with minimal a-priori structural assumptions while being immune to Lucas critique, enhancing credibility of the analysis. Then, I apply the methodology to quantify how fiscal unions contribute to regional stabilization. I focus on models where the federal government redistributes resources via a transfer policy rule in order to smooth local shocks. This rule is a function of local variables. Using US state-level data, I construct a counterfactual US economy without the rule in place. This counterfactual is identical in many fiscal union models with rich features, such as nominal rigidities and asset market incompleteness. My primary finding is that during the Great Recession fiscal integration significantly reduced cross-state employment differences by redistributing resources from states that were doing relatively well to states that were doing relatively poorly. Finally, I discuss how the methodology can further be used to falsify a set of models, provided data before and after a policy change are available

Url: http://home.uchicago.edu/~maberaja/Martin_Beraja_JMP.pdf

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Authors: Beraja, Martin

Publisher: University of Chicago Dept. of Economics

Data Collections: IPUMS USA

Topics: Other

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