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Working Paper
The Determination of Public Debt under both Aggregate and Idiosyncratic Uncertainty
Wen, Yi; Chien, YiLi (2021-12-29)
We use an analytically tractable, heterogeneous-agent incomplete-markets model to show that the Ramsey planner’s decision to finance stochastic public expenditures implies a departure from tax smoothing and an endogeneous mean-reverting force to support positive debt growth despite the government’s precautionary saving motives. Specifically, the government’s attempt to balance the competing incentives between its own precautionary saving (tax smoothing) and households’ precautionary saving (individual consumption smoothing)—even at the cost of extra tax distortion—implies an ...
Working Papers , Paper 2019-038

Working Paper
Did the Tax Cuts and Jobs Act Create Jobs and Stimulate Growth?
Kumar, Anil (2022-04-21)
The Tax Cuts and Jobs Act (TCJA) of 2017 is the most extensive overhaul of the U.S. income tax code since the Tax Reform Act of 1986. Existing estimates of TCJA’s economic impact are based on economic projections using pre-TCJA estimates of tax effects. I exploit plausibly exogenous state-level variation in tax changes from TCJA and find that an income tax cut equaling 1 percent of GDP led to a 1.3 percentage point faster job growth and nearly 1.5 percentage points higher GDP growth. The impact on growth was the strongest in the year of the tax change, with much smaller effects in the ...
Working Papers , Paper 2001

Working Paper
Time-Inconsistent Optimal Quantity of Debt
Wen, Yi; Chien, YiLi (2020-10-29)
A key feature of the infinite-horizon heterogeneous-agents incomplete-markets (Inf-HAIM) framework is that the equilibrium interest rate of public debt lies below the time discount rate (regardless of capital). This happens because of a positive liquidity premium on asset returns due to imperfect risk sharing. This fundamental property of standard Inf-HAIM models, however, implies that the Ramsey planner's fiscal policy may be time-inconsistent---because the planner has a dominate incentive to issue plenty of debt such that all households are fully self-insured against idiosyncratic risk ...
Working Papers , Paper 2020-037

Working Paper
Old, Frail, and Uninsured: Accounting for Puzzles in the U.S. Long-Term Care Insurance Market
Braun, R. Anton; Koreshkova, Tatyana; Kopecky, Karen A. (2017-03-01)
Half of U.S. 50-year-olds will experience a nursing home stay before they die, and one in ten will incur out-of-pocket long-term care expenses in excess of $200,000. Surprisingly, only about 10% of individuals over age 62 have private long-term care insurance (LTCI). This paper proposes a quantitative equilibrium optimal contracting model of the LTCI market that features screening along the extensive margin. Frail and/or poor risk groups are ordered a single contract of no insurance that we refer to as a rejection. According to our model, rejections are the main reason that LTCI take-up rates ...
FRB Atlanta Working Paper , Paper 2017-3

Working Paper
Optimal Taxation with Endogenous Default under Incomplete Markets
Pouzo, Demian; Presno, Ignacio (2020-08-20)
How are the optimal tax and debt policies affected if the government has the option to default on its debt? We address this question from a normative perspective in an economy with noncontingent government debt, domestic default and labor taxes. On one hand, default prevents the government from incurring future tax distortions that would come along with the service of the debt. On the other hand, default risk gives rise to endogenous credit limits that hinder the government's ability to smooth taxes. We characterize the fiscal policy and show how the option to default alters the near-unit ...
International Finance Discussion Papers , Paper 1297

Working Paper
The Determination of Public Debt under both Aggregate and Idiosyncratic Uncertainty
Wen, Yi; Chien, YiLi (2020-08-13)
We use an analytically tractable model to show that the Ramsey planner's decisions to finance stochastic public expenditures under uninsurable idiosyncratic risk implies a departure from tax smoothing. In the absence of state-contingent bonds the government's attempt to balance the competing incentives between tax smoothing and individual consumption smoothing---even at the cost of extra tax distortion---implies a bounded stochastic unit root component in optimal taxes. Nonetheless, a sufficiently high average level of public debt to support individuals’ self-insurance position is welfare ...
Working Papers , Paper 2019-038

Journal Article
Optimal Capital Taxation and Precautionary Savings
Chen, Yunmin; Chien, YiLi; Yang, C.C. (2021-07-01)
There are multiple reasons to motivate the role of capital taxation in the heterogenous-agent incomplete-markets (HAIM) model. One is the production inefficiency caused by precautionary savings. The other is the wealth redistribution role played by capital taxation. To distinguish between these two reasons, this article uses an analytical tractable HAIM model with a degenerated distribution of wealth while preserving the role of precautionary savings. The degenerated wealth distribution shuts down the distributional role played by capital taxation. Our results show that, with no role to play ...
Review , Volume 103 , Issue 3 , Pages 333-350

Working Paper
Subcontracting in Federal Spending: Micro and Macro Implications
Zhou, Xiaoqing; Zubairy, Sarah; Park, Geumbi (2026-05-12)
This paper studies the critical but underexplored role of subcontracting in shaping the spatial and firm-level effects of federal government spending, introducing a new channel through which fiscal shocks propagate. Using newly available data on defense subcontracts merged with firm-level data, we document that a substantial share of spending is reallocated via subcontracts across regions beyond what is implied by the location of prime contracts. Firm-to-firm flows further show that subcontracting redirects spending toward large, goods-producing firms. We develop an empirical strategy that ...
Working Papers , Paper 2535

Working Paper
Optimal Dynamic Tax-Transfer Policies in Heterogeneous-Agents Economies
Wen, Yi; Chien, YiLi (2025-06-27)
When designing an optimal tax-transfer system, the existing literature identifies two key factors: labor efficiency and debt efficiency. The labor-efficiency approach emphasizes the trade-off between redistribution and distortion in the labor market, while the debt-efficiency approach emphasizes the trade-off between monopoly rent gains and distortion in the asset market. In this paper, we propose a third factor for designing optimal tax-transfer policies: the dynamic-efficiency approach. To demonstrate this, we use an analytically tractable infinite-horizon model incorporating both ex-ante ...
Working Papers , Paper 2023-009

Working Paper
Optimal Dynamic Tax-Transfer Policies in Heterogeneous-Agents Economies
Wen, Yi; Chien, YiLi (2023-05-01)
In the design of an optimal tax-transfer system, there are two complementary conventional wisdoms: the labor-efficiency argument and the debt-efficiency argument. The former emphasizes the trade-off between redistribution and distortions in the labor market, while the latter emphasizes the trade-off between gains from monopoly rents and distortions in the asset market. We use an analytically tractable infinite-horizon model with both ex-ante and ex-post heterogeneity to show that neither argument is complete in the design of the tax-transfer system. Instead, in Aiyagari-type models the ...
Working Papers , Paper 2023-009

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