Telling Macro Stories with Micro

Claudia Sahm:

Telling macro stories with micro: Don't let the equations, data, or jargon fool you, economists are avid storytellers. Our "stories" may not fit neatly in the seven universal plots but after awhile it's easy to spot some patterns. A good story paper in economics, according to David Romer, has three characteristics: a viewpoint, a lever, and a result.

Most blog or media coverage of an economics paper focuses on the result. Makes sense given the audience but buyer beware. Economists dissecting a paper spend more time on the lever, the how-did-they-get-the-result part. And coming up with new levers is a big chunk of research. The viewpoint--the underlying assumptions, the what's-central-to-the-story--tends to get short shrift. Of course, the viewpoint matters (often that's what defines a a story as economics), but it usually holds across many papers. Best to focus the new stuff.

Except when the viewpoint comes under scrutiny, then the stories can really change. ...

How much does micro matter for macro?

One long-standing viewpoint in economics is that changes in the macro-economy can largely be understood by studying changes in macro aggregates. Ironically, this viewpoint even survived macro's push to micro foundations with a "representative agent" stepping in as the missing link between aggregate data and micro theory. As a macro forecaster, I understand the value of the aggregates-only simplification. As an applied micro researcher, I am pretty sure it fails us from time to time. Thankfully, an ever-growing body of research and commentary is helping to identify times when differences at the micro level are relevant for macro outcomes. This is not new--issues of aggregation in macro go waaay back--but our levers, with rich, timely micro data and high-powered computation, are improving rapidly.

I focus in this post on differences in household behavior, particularly related to consumer spending, since that's the area I know best. And I want to discuss results from an ambitious new paper: "Macroeconomics and Household Heterogeneity" by Krueger, Mitman, and Perri. tldr: I am skeptical of their results, above all, the empirics, but I really like what they are trying to do, to shift the macro viewpoint. More on this paper below, but also want to set it in the context of macro storytelling. ...

There's quite a bit more.