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Working Paper
Bank Liquidity and Capital Regulation in General Equilibrium
We develop a nonlinear dynamic general equilibrium model with a banking sector and use it to study the macroeconomic impact of introducing a minimum liquidity standard for banks on top of existing capital adequacy requirements. The model generates a distribution of bank sizes arising from differences in banks' ability to generate revenue from loans and from occasionally binding capital and liquidity constraints. Under our baseline calibration, imposing a liquidity requirement would lead to a steady-state decrease of about 3 percent in the amount of loans made, an increase in banks' holdings ...
Working Paper
Human Capital Risk, Contract Enforcement, and the Macroeconomy
We use data from the Survey of Consumer Finance and Survey of Income Program Participation to show that young households with children are under-insured against the risk that an adult member of the household dies. We develop a tractable macroeconomic model with human capital risk, age-dependent returns to human capital investment, and endogenous borrowing constraints due to the limited pledgeability of human capital (limited contract enforcement). We show analytically that, consistent with the life insurance data, in equilibrium young households are borrowing constrained and under-insured ...
Working Paper
Mobility
This paper studies short-run wealth mobility in a heterogeneous agents, incomplete-markets model. Wealth mobility has a ?hump-shaped? relationship with the persistence of the stochastic process governing labor income: low when shocks are close to i.i.d. or close to a random walk, and higher in between. The standard incomplete markets framework features less wealth mobility than found in the PSID wealth supplements. We include features commonly used in the literature to capture wealth inequality and find that they do little to improve the model?s performance for wealth mobility. Finally, we ...
Working Paper
A Comment on 'Wealth Inequality and Endogenous Growth' by Byoungchan Lee
How does wealth inequality affect economic growth? Byoungchan Lee answers this question by developing a heterogeneous-agent model and augmenting it with endogenous firm innovation. The novel channel is that rising wealth concentration reduces aggregate demand, which gives firms a disincentive to spend on R&D and therefore leads to slower productivity growth. In this discussion, we first explain the difference in calibration strategy between Lee’s approach and the common approach in the literature, and then discuss its quantitative implications for the effect of rising inequality on ...
Working Paper
Enduring Relationships in an Economy with Capital and Private Information
We study efficient risk sharing in a model where agents operate linear production technologies with private information about idiosyncratic productivity. Capital is the sole factor of production, and accumulable. We establish a time-invariant, one-to-one mapping between the capital allocated to an agent and his lifetime utility entitlement. The mapping implies properties that are distinct from those in models with private information about endowments. In contrast to the latter, the value of the risk-sharing arrangement in our model always remains above the autarky value. There is no need for ...
Working Paper
Optimal Time-Consistent Taxation with Default
We study optimal time-consistent distortionary taxation when the repayment of government debt is not enforceable. The government taxes labor income or issues noncontingent debt in order to finance an exogenous stream of stochastic government expenditures. The government can repudiate its debt subject to some default costs, thereby introducing some state-contingency to debt. We are motivated by the fact that domestic sovereign default is an empirically relevant phenomenon, as Reinhart and Rogoff (2011) demonstrated. Optimal policy is characterized by two opposing incentives: an incentive to ...
Working Paper
Optimal taxation and debt with uninsurable risks to human capital accumulation
We consider an economy where individuals face uninsurable risks to their human capital accumulation and study the problem of determining the optimal level of linear taxes on capital and labor income together with the optimal path of the debt level. We show both analytically and numerically that in the presence of such risks it is beneficial to tax both labor and capital income and to have positive government debt.
Working Paper
Consumer Bankruptcy, Mortgage Default and Labor Supply
We specify and estimate a lifecycle model of consumption, housing demand and labor supply in an environment where individuals may file for bankruptcy or default on their mortgage. Uncertainty in the model is driven by house price shocks, education specific productivity shocks, and catastrophic consumption events, while bankruptcy is governed by the basic institutional framework in the U.S. as implied by Chapter 7 and Chapter 13. The model is estimated using micro data on credit reports and mortgages combined with data from the American Community Survey. We use the model to understand the ...
Working Paper
The Politics of Flat Taxes
We study the determination of flat tax systems using a workhorse macroeconomic model of inequality. Our first result is that, despite the multidimensional policy space, equilibrium policies are typically unique (up to a fine grid numerical approximation). The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) generally low transfers. We discuss the role of three factors?the initial heterogeneity in sources of income, the mobility of income and wealth, and the forward-looking aspect of voting?in ...
Working Paper
Preventive vs. Curative Medicine: A Macroeconomic Analysis of Health Care over the Life Cycle
This paper studies differences in health care usage and health outcomes between low- and high-income individuals. Using data from the Medical Expenditure Panel Survey (MEPS) I find that early in life the rich spend significantly more on health care, whereas from middle to very old age medical spending of the poor surpasses that of the rich by 25%. In addition, low-income individuals are less likely to incur any medical expenditures in a given year, yet, when they do, their expenses are more likely to be extreme. To account for these facts, I develop and estimate a life-cycle model of two ...