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Data Confirm: Earthquakes Not Good for Boosting Output

Posted on April 3, 2014

Tyler Cowen links to a paper by Johannes Wieland. The following excerpt from the paper should give you some insight into the state of formal economics:

Standard sticky-price models predict that temporary, negative supply shocks are expansionary at the zero lower bound (ZLB) because they raise inflation expectations and lower expected real interest rates, which stimulates consumption. This paper tests that prediction with oil supply shocks, an earthquake, and inflation risk premia, demonstrating that negative supply shocks are contractionary at the ZLB despite also lowering expected real interest rates. These findings are rationalized in a model with financial frictions, where negative supply shocks reduce asset prices and net worth, translating into larger borrowing spreads so that consumption contracts. In this data-consistent model fiscal stimulus at the ZLB is substantially less effective than in standard sticky-price models.

Let me translate: The author is saying something like, “Some economists since 2008 have been touting the efficacy of government deficit spending when interest rates are near 0%. The standard models used to rationalize these policy recommendations work through a particular channel. This mechanism has the counter-intuitive property that in this type of scenario, a sudden disruption in oil deliveries, or even an earthquake, could actually lead to higher economic output. However, I have tested this empirically, and find that even when interest rates are low, earthquakes reduce economic activity. This leads me to
question whether government deficit-spending is actually a really good idea when interest rates are near zero.”

In case the reader doubts my summary, go read John Cochrane’s discussion of the paper back in 2013 (I guess when he read a working version of it).

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One thought on “Data Confirm: Earthquakes Not Good for Boosting Output

  1. william spires says:

    The report has about as much of a plot as a dictionary but at least a dictionary is useful for word meanings.