Fiscal Policy and Economic Activity

Conventionally, macroeconomic consequences of economic policy have been researched in structural vector autoregressions (SVAR). Fiscal policy SVAR models estimated for the U.S. are usually supportive for large fiscal policy effects on output. In one prominent example, the tax multiplier is estimated as -1.33, and the spending multiplier as 1.29 (Blanchard and Perotti, 2002). SVAR models require untestable identification assumptions; thus, prompting the search for natural experiments as an alternative source of identification. In a particularly influential study, Romer and Romer (2010) construct a historical account of exogenous legislated U.S. tax changes and estimate a much larger tax multiplier of around -3. Applications of the SVAR methodology to Germany have generally found rather small effects of fiscal policy on output. In Hayo and Uhl (2014a), we use a natural experiment approach, closely following Romer and Romer (2010), and find strong effects of tax changes on output. Based on our evidence, one can conjecture that the tax multiplier in Germany might be as large as -2.4. The estimated tax multipliers are much larger than alternative estimates derived in fiscal policy VAR models for Germany. Implementing this study required intensive data collection processes; Uhl (2013) contains the documentation of these efforts. Most studies on the macroeconomic consequences of fiscal policy use aggregate nationwide data. In Hayo and Uhl (2014b), we estimate the consequences of federal tax policy actions for regional economic activity in the U.S. We find considerable variation in how regional output reacts to federal tax changes and that estimated state multipliers range between –0.2 in Utah and –3.7 in Hawaii. An econometric analysis of determinants behind these differences reveals that the size and composition of a state tax base is related to the strength of the local income reaction. These results improve our understanding of the precise transmission mechanism of fiscal policy shocks. In Uhl (2014), I estimate the consequences of U.S. state-level fiscal policies for local economic activity and conclude that state-level spending multipliers are relatively small, while tax multipliers are large. These results allow for assessing the consequences of subnational fiscal policies and provide stylized-facts on fiscal multipliers in a monetary union. It is interesting to note that estimated multipliers at the state level are comparable to estimates derived at the country level despite their different transmission mechanism. I also find that both increases in state spending and in state taxes improve out-of-state output which suggests that spillovers among states or countries are relevant. Inference on ‘fiscal multipliers’ in aggregate time series requires untestable identification assumptions. Asking economic agents directly about their responses to fiscal policy is an appealing non-standard alternative. Shapiro and Slemrod (1995), and follow-up papers, ask U.S. residents about their consumption responses to various tax changes. We extend on this research by directly asking the German population about their consumption and labor supply responses to a recent 2013 payroll tax change using a representative population survey (Hayo et al., 2014, Hayo and Uhl, 2014c, and Hayo and Uhl, 2014d). About 55 per cent of the respondents indicate that they have increased spending; suggesting that tax changes in Germany have a relatively large impact on consumption and, hence, on economic activity. Based on the evidence from this representative survey, the effects of tax changes on labor supply, however, are likely small. The relative dominance of consumption responses, vis-à-vis labor supply responses, is a conclusion that is also present in the aggregate time series evidence in Hayo and Uhl (2014a). One further noteworthy implication from our representative survey is that currently low interest rates reduce incentives to save as well as incentives for labor supply

And Action: TV Sentiment and the US Consumer

With a novel data set, we test whether sentiment in TV news can be used as a proxy for consumer sentiment in order to explain changes in private consumption growth in the United States. The University of Michigan Index of Consumer Sentiment (ICS) is taken to compare its explanatory power with TV sentiment in classical consumer behaviour models. We find that TV sentiment can be used at least as good a proxy for consumer sentiment as the ICS, while TV sentiment can best explain private consumption behaviour with personal income and savings

Challenging the Intrapersonal Empathy Gap An Experiment with Self-Commitment Power

Loewenstein (1996, 2005) identifies an intrapersonal empathy gap. In the respective experiments, subjects make choices with delayed consequences. When entering the state where these consequences would unfold, they get the possibility to revise their initial choice. Revisions are more substantial when these two choices are made in different emotional states. The concept of the empathy gap suggests that the initial choice represents a misprediction of future preferences. However, it might alternatively be based on a well understood disagreement with future preferences. In this sense, people would like to add: "But don't ask me again!" To disentangle both explanations, we induce two different emotional states in each subject and offer a self-commitment device in the first state. In one condition, subjects move from a "cold" state of reflection to a "hot" state of impulsiveness. In the other condition, this order is reversed. We find evidence for the hot-to-cold empathy gap, but not for the cold-to-hot empathy gap when subjects can self-commit to their initial choice.Intrapersonal empathy gap, self-commitment, intrapersonal conflict, naiveté, sophistication

Imperfect Recall and Time Inconsistencies: An experimental test of the absentminded driver "paradox"

Absentmindedness is a special case of imperfect recall which according to Piccione and Rubinstein (1997a) leads to time inconsistencies. Aumann, Hart and Perry (1997a) question their argument and show how dynamic inconsistencies can be resolved. The present paper explores this issue from a descriptive point of view by examining the behavior of absentminded individuals in a laboratory environment. Absentmindedness is manipulated in two ways. In one treatment, it is induced by cognitively overloading participants. In the other, it is imposed by randomly matching decisions with decision nodes in the information set. The results provide evidence for time inconsistencies in all treatments. We introduce a behavioral principal, which best explains the data.imperfect recall, absentmindedness, dynamic inconsistency, experiment

Technical analysis: Novel insights on contrarian trading

We analyze the predictive power of technical analysis with a novel data set based on news sentiment that allows to systematically examine a set of technical analysis indicators over an extensive time period. We do not find much statistically significant relationships with the examined indicators and future asset returns, and we almost do not find any alphas in trading strategies based on technical analysis sentiment. We find evidence for a contrarian-based hypothesis: past market returns and technical analysis sentiment are able to predict future technical analysis sentiment with a negative relationship