Macroeconomic Consequences of Accounting: The Effect of Accounting Conservatism on Macroeconomic Indicators and the Money Supply

Abstract

This study investigates the macroeconomic consequences of firm-level accounting conservatism. Consistent with conditional conservatism extending to the aggregate level, I demonstrate that annual estimates of aggregate corporate profits and gross domestic product compiled by the U.S. Bureau of Economic Analysis are more sensitive to negative aggregate news than to positive aggregate news. Next, I estimate the dollar value impact of conservatism on measurements of macroeconomic fundamentals. Finally, I show that incorporating the dollar value impact of conservatism increases the explanatory power of a monetary policy reaction function that describes U.S. Federal Reserve interest rate decision behavior. These results suggest that accounting can impact social welfare by altering the measurement attributes of key macroeconomic indicators and by shaping monetary policy decisions which regulate the money supply.