Discussion Paper Details

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Title: Natural Experiments in Macroeconomics

Author(s): Nicola Fuchs-Schündeln and Tarek Alexander Hassan

Publication Date: May 2015

Keyword(s): Civic Capital, Fiscal Multiplier, Institutions, Multiple Equilibria, Networks, Permanent Income Hypothesis, Social Structure, Social Ties and Trust

Programme Area(s): International Macroeconomics, International Trade and Regional Economics and Public Economics

Abstract: A growing literature relies on natural experiments to establish causal effects in macroeconomics. In diverse applications, natural experiments have been used to verify underlying assumptions of conventional models, quantify specific model parameters, and identify mechanisms that have major effects on macroeconomic quantities but are absent from conventional models. We discuss and compare the use of natural experiments across these different applications and summarize what they have taught us about such diverse subjects as the validity of the Permanent Income Hypothesis, the size of the fiscal multiplier, and about the effects of institutions, social structure, and culture on economic growth. We also outline challenges for future work in each of these fields, give guidance for identifying useful natural experiments, and discuss the strengths and weaknesses of the approach.

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Bibliographic Reference

Fuchs-Schündeln, N and Hassan, T. 2015. 'Natural Experiments in Macroeconomics'. London, Centre for Economic Policy Research.