Natural Experiments in Macroeconomics

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.

Keywords: Permanent Income Hypothesis, Fiscal Multiplier, Institutions, Social Ties, Networks, Social Structure, Civic Capital, Trust, Multiple Equilibria

JEL Classification: C1, C9, E21, E62, H31, O11, O14, O43, O50