Transfer Payments and the Macroeconomy: The Effects of Social Security Benefit Changes, 1952-1991

Christina Romer and David Romer

No 20087, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: From the early 1950s to the early 1990s, increases in Social Security benefits in the United States varied widely in size and timing, and were only rarely undertaken in response to short-run macroeconomic developments. This paper uses these benefit increases to investigate the macroeconomic effects of changes in transfer payments. It finds a large, immediate, and statistically significant response of consumption to permanent changes in transfers. The response appears to decline at longer horizons, however, and there is no clear evidence of effects on industrial production or employment. These effects differ sharply from the effects of relatively exogenous tax changes: the impact of transfers is faster, but much less persistent and dramatically smaller overall. Finally, we find strong statistical and narrative evidence of a sharply contractionary monetary policy response to permanent benefit increases that is not present for tax changes. This may account for the lower persistence of the consumption effects of transfers and their failure to spread to broader indicators of economic activity.

JEL-codes: E21 E62 E63 H31 N12 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-mac and nep-pbe
Note: DAE EFG ME PE
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Citations: View citations in EconPapers (5)

Published as Romer, Christina D., and David H. Romer. 2016. "Transfer Payments and the Macroeconomy: The Effects of Social Security Benefit Increases, 1952-1991." American Economic Journal: Macroeconomics, 8 (4): 1-42. DOI: 10.1257/mac.20140348

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