What can we learn from cross-sectional empirical estimates in macroeconomics?
Guren, Aadam; McKay, Alisdair; Nakamura, Emi; Steinsson, Jón
Recent empirical work uses variation across cities or regions to identify the effects of economic
shocks of interest to macroeconomists. The interpretation of such estimates is complicated by
the fact that they reflect both partial equilibrium and local general equilibrium effects of the
shocks. We propose an approach for recovering estimates of partial equilibrium effects from these
cross-regional empirical estimates. The basic idea is to divide the cross-regional estimate by an
estimate of the local fiscal multiplier, which measures the strength of local general equilibrium
amplification. We apply this approach to recent estimates of housing wealth effects based on
city-level variation, and derive conditions under which the adjustment is exact. We then evaluate
its accuracy in a richer general equilibrium model of consumption and housing. The paper also
reconciles the positive cross-sectional correlation between house price growth and construction
with the notion that cities with larger price volatility have lower housing supply elasticities using
a model in which housing supply elasticities are more dispersed in the long run than in the short
run.
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