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Working Paper
Reconstructing the great recession
This paper evaluates the role of the construction sector in accounting for the performance of the U.S. economy before, during and after the Great Recession. We use input-output analysis to evaluate its linkages with the rest of the economy and measure the transmission of its demand shocks to the overall economy. Such effects are quantified by means of a dynamic multi-sector model parameterized to reproduce the boom-bust dynamics of employment in construction during 2000-13. The model suggests that the interlinkages account for a large share of the actual changes in aggregate employment and ...
Working Paper
Optimal Fiscal Policy in Overlapping Generations Models
In this paper, we explore the proposition that the optimal capital income tax is zero using an overlapping generations model. We prove that for a large class of preferences, the optimal capital income tax along the transition path and in steady state is non-zero. For a version of the model calibrated to the US economy, we find that the model could justify the observed rates of capital income taxation for an empirically reasonable intertemporal utility function and a robust demographic structure.
Working Paper
Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession
Using a model with housing search, endogenous credit constraints, and mortgage default, this paper accounts for the housing crash from 2006 to 2011 and its implications for aggregate and cross-sectional consumption during the Great Recession. Left tail shocks to labor market uncertainty and tighter down payment requirements emerge as the key drivers. An endogenous decline in housing liquidity amplifies the recession by increasing foreclosures, contracting credit, and depressing consumption. Balance sheets act as a transmission mechanism from housing to consumption that depends on gross ...
Working Paper
Mortgages and Monetary Policy
Mortgages are long-term loans with nominal payments. Consequently, under incomplete asset markets, monetary policy can affect housing investment and the economy through the cost of new mortgage borrowing and real payments on outstanding debt. These channels, distinct from traditional real rate channels, are embedded in a general equilibrium model. The transmission mechanism is found to be stronger under adjustable- than fixed-rate mortgages. Further, monetary policy shocks affecting the level of the nominal yield curve have larger real effects than transitory shocks, affecting its slope. ...
Working Paper
Generational policy and the macroeconomic measurement of tax incidence
In this paper we show that the generational accounting framework used in macroeconomics to measure tax incidence can, in some cases, yield inaccurate measurements of the tax burden across age cohorts. This result is very important for policy evaluation, because it shows that the selection of tax policies designed to change generational imbalances could be misleading. We illustrate this problem in the context of a Social Security reform where we show how fiscal policy can affect the intergenerational gap across cohorts without impacting the distribution of welfare. We provide a more accurate ...
Working Paper
Mortgage contracts and housing tenure decisions
In this paper, we analyze various mortgage contracts and their implications for housing tenure and investment decisions using a model with heterogeneous consumers and liquidity constraints. We find that different types of mortgage contracts influence these decisions through three dimensions: the downpayment constraint, the payment schedule, and the amortization schedule. Contracts with lower downpayment requirements allow younger and lower income households to enter the housing market earlier. Mortgage contracts with increasing payment schedules increase the participation of first-time ...
Working Paper
Optimal response to a transitory demographic shock in Social Security financing
We examine the optimal policy response to a transitory demographic shock that affects negatively the financing of retirement pensions. In contrast to existing literature, we endogenously determine optimal policies rather than exploring implications of exogenous parametric policies. Our approach identifies optimal strategies of the social security administration to guarantee the financial sustainability of existing retirement pensions in a Pareto improving way. Hence, no cohort will pay the cost of the demographic shock. We find that the optimal strategy is based in the following ingredients: ...
Working Paper
A general equilibrium theory of college with education subsidies, in-school labor supply, and borrowing constraints
This paper analyzes the effectiveness of three different types of education policies: tuition subsidies (broad based, merit based, and flat tuition), grant subsidies (broad based and merit based), and loan limit restrictions. We develop a quantitative theory of college within the context of general equilibrium overlapping generations economy. College is modeled as a multi-period risky investment with endogenous enrollment, time-to-degree, and dropout behavior. Tuition costs can be financed using federal grants, student loans, and working while at college. We show that our model accounts for ...
Working Paper
The tax treatment of homeowners and landlords and the progressivity of income taxation
This paper analyzes the connection between the asymmetric tax treatment of homeowners and landlords and the progressivity of income taxation using a quantitative overlapping generations general equilibrium model with housing and rental markets. Our model emphasizes the determinants of tenure choice (own vs. rent) and the household decision to supply housing services to the rental market. This formulation breaks the link between the rental price and the equilibrium interest rate and, hence, the aggregate supply of rental property responds differently to the direction of rental price changes, ...
Working Paper
Estate taxation with warm-glow altruism
This article examines the properties of the optimal fiscal policy in an economy with warm-glow altruism (utility interdependence) and heterogeneous individuals. We propose a new efficiency concept, D-efficiency, that considers an implicit constraint in the act of giving: donors cannot bequeath to donees more than their existing resources. Considering this constraint, we show that the market equilibrium is not socially efficient. The efficient level of bequest transfers can be implemented by the market with estate and labor-income subsidies and a capital-income tax. In the absence of lump-sum ...