Economic Impact of Stimulus Spending: A Response to Menzie Chinn

Karen Campbell / February 10, 2010

At Econbrowser, Dr. Menzie Chinn provides a succinct summary of my critique of CEA’s “Economic Impact of the Stimulus” report when he writes, “…these implied increments to growth rates do not jibe with the inferences drawn by Dr. Campbell — that the impact on GDP is much smaller than CEA asserts when using forecasts from the other agencies and firms.” (italics mine).

My critique was that the CEA’s method for estimating the economic impact of the American Recovery and Reinvestment Act (ARRA) cannot be used to make a meaningful inference about the economic impact of ARRA quantitatively (or qualitatively).

The CEA admits, as does Dr. Chinn, that numerous other events and actions were taking place that could explain the difference between the forecast and actual data. The economic analysis undertaken by the CEA either needed to use econometric tools to separate out and isolate the ARRA effect in the difference between the forecast and actual or they needed to run an impulse response of ARRA on their VAR model (a counterfactual analysis). That is, if they were going to use a VAR approach to study the impact of ARRA they needed to establish the baseline and then introduce ARRA to that same VAR model. For example, Christine Romer and David Romer used such an approach in their paper “The Macroeconomic Effects Of Tax Changes: Estimates Based On A New Measure Of Fiscal Shocks”. (more…)