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Working Paper
Estimating the Tax and Credit-Event Risk Components of Credit Spreads
Goldstein, Robert S.; Benzoni, Luca (2015-11-18)
This paper argues that tax liabilities explain a large fraction of observed short-maturity investment-grade (IG) spreads, but credit-event premia do not. First, we extend Duffie and Lando (2001) by permitting management to issue both debt and equity. Rather than defaulting, managers of IG firms who receive bad private signals conceal this information and service existing debt via new debt issuance. Consistent with empirical observation, this strategy implies that IG firms have virtually zero credit-event risk (at least until they become ?fallen angels"). Second, we provide empirical evidence ...
Working Paper Series , Paper WP-2017-17

Working Paper
Unequal Climate Policy in an Unequal World
Hur, Sewon; Carroll, Daniel R.; Belfiori, Elisa (2026-02-02)
We characterize optimal climate policy in an economy with heterogeneous households and non-homothetic preferences. We focus on constrained efficiency, where the planner is restricted from transferring resources across households. We derive three results. First, the constrained-optimal carbon tax is heterogeneous and progressive. Second, if restricted to a uniform tax, the optimal rate is lower than the standard Pigouvian level due to inequality. Third, this allocation can be decentralized using only uniform instruments—a carbon tax, a clean subsidy and a lump-sum transfer. In a quantitative ...
Globalization Institute Working Papers , Paper 427

Report
Optimal Policy for Macro-Financial Stability
Young, Eric R.; Benigno, Gianluca; Otrok, Christopher; Chen, Huigang; Rebucci, Alessandro (2019-10-01)
There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. These normative analyses build upon the concept of constrained efficient allocation, where the social planner is constrained by the same borrowing limit that agents face. In this paper, we show that the same set of policy tools that implement the constrained efficient allocation can be used by a Ramsey planner to replicate the unconstrained allocation, thus achieving higher welfare. The constrained social planner approach may lead to inaccurate ...
Staff Reports , Paper 899

Discussion Paper
What Is a Carbon Tariff and Why Is the EU Imposing One?
Coster, Pierre; di Giovanni, Julian; Méjean, Isabelle (2026-01-07)
The European Union has been an early adopter of carbon policies, with the introduction of the EU Emissions Trading System (ETS) in 2005. This scheme sets a common price for carbon and is applied to the most polluting manufacturing sectors. By increasing the cost of emissions-intensive production, the system incentivizes firms to decrease their use of fossil fuels. However, as we show in a companion post, the policy’s impact was moderated by firms increasing their reliance on high-emissions imports. To eliminate this workaround, the EU will expand the ETS to imports in 2026, through the ...
Liberty Street Economics , Paper 20260107b

Working Paper
Unequal Climate Policy in an Unequal World
Belfiori, Elisa; Carroll, Daniel R.; Hur, Sewon (2024-07-16)
We study climate policy in an economy with heterogeneous households, two types of goods (clean and dirty), and a climate externality from the dirty good. Using household expenditure and emissions data, we document that low-income households have higher emissions per dollar spent than high-income households, making a carbon tax regressive. We build a model that captures this fact and study climate policies that are neutral with respect to the income distribution. A central feature of these policies is that resource transfers across consumers are ruled out. We show that the constrained optimal ...
Globalization Institute Working Papers , Paper 427

Working Paper
Preventing Controversial Catastrophes
Baker, Steven D.; Osambela, Emilio; Hollifield, Burton (2018-07-19)
In a market-based democracy, we model different constituencies that disagree regarding the likelihood of economic disasters. Costly public policy initiatives to reduce or eliminate disasters are assessed relative to private alternatives presented by financial markets. Demand for such public policies falls as much as 40% with disagreement, and crowding out by private insurance drives most of the reduction. As support for disaster-reducing policy jumps in periods of disasters, costly policies may be adopted only after disasters occur. In some scenarios constituencies may even demand policies ...
Finance and Economics Discussion Series , Paper 2018-052

Working Paper
Recycling Carbon Tax Revenue to Maximize Welfare
Fried, Stephie; Peterman, William B.; Novan, Kevin (2021-04-02)
This paper explores how to recycle carbon tax revenue back to households to maximize welfare. Using a general equilibrium lifecycle model calibrated to reflect the heterogeneity in the U.S. economy, we find the optimal policy uses two thirds of carbon-tax revenue to reduce the distortionary tax on capital income while the remaining one third is used to increase the progressivity of the labor-income tax. The optimal policy attains higher welfare and more equality than the lump-sum rebate approach preferred by policymakers as well as the approach originally prescribed by economists -- which ...
Finance and Economics Discussion Series , Paper 2021-023

Working Paper
Time-Limited Subsidies: Optimal Taxation with Implications for Renewable Energy Subsidies
Ricks, Michael David; Kay, Owen (2025-08-05)
Pigouvian subsidies are efficient, but output subsidies with uncertain or limited durations are not Pigouvian. We show that optimal “time-limited” policies must also subsidize investment to correct externalities generated after the output subsidy ends. Furthermore, an output subsidy’s optimal duration is characterized by the change in production when it ends. In the wind-energy industry, we find that power generation decreases by 5-10% after the end of facilities’ ten-year eligibility for the Renewable Energy Production Tax Credit. This behavioral response has implications for energy ...
Working Papers , Paper 2530

Working Paper
On the optimal design of transfers and income-tax progressivity
Ferrière, Axelle; Grübener, Philipp; Navarro, Gaston; Vardishvili, Oliko (2022-08-01)
We study the optimal design of means-tested transfers and progressive income taxes. In a simple analytical model, we demonstrate an optimally negative relation between transfers and income-tax progressivity due to efficiency and redistribution concerns. In a rich dynamic model, we quantify the optimal plan with flexible tax-and-transfer functions. Transfers should be larger than currently in the U.S. and financed with moderate income-tax progressivity. Transfers are key to implement higher progressivity in average than in marginal tax-and-transfer rates, achieving redistribution while ...
International Finance Discussion Papers , Paper 1350

Report
U.S. Banks’ Exposures to Climate Transition Risks
Seltzer, Lee; Santos, João A. C.; Jung, Hyeyoon (2023-04-01)
We build on the estimated sectoral effects of climate transition policies from the general equilibrium models of Jorgenson et al. (2018), Goulder and Hafstead (2018), and NGFS (2022a) to investigate U.S. banks’ exposures to transition risks. Our results show that while banks’ exposures are meaningful, they are manageable. Exposures vary by model and policy scenario with the largest estimates coming from the NGFS (2022a) disorderly transition scenario, where the average bank exposure reaches 9 percent as of 2022. Banks’ exposures increase with the stringency of a carbon tax policy but ...
Staff Reports , Paper 1058

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