Fiscal Policy during a Pandemic
I study the effects of the 2019-20 coronavirus outbreak in the United States and subsequent fiscal policy response in a nonlinear DSGE model. The pandemic is a shock to the utility of contact-intensive services that propagates to other sectors via general equilibrium, triggering a deep recession. I use a calibrated version of the model to analyze different types of fiscal policies. I find that UI benefits are the most effective tool to stabilize income for borrowers, who are the hardest hit, while savers may favor unconditional transfers. Liquidity assistance programs are effective if the ...
Fiscal Policy during a Pandemic
I use a dynamic stochastic general equilibrium model to study the effects of the 2019-20 coronavirus pandemic in the United States. The pandemic is modeled as a large negative shock to the utility of consumption of contact-intensive services. General equilibrium forces propagate this negative shock to the non-services and financial sectors, triggering a deep recession. I use a calibrated version of the model to analyze different types of fiscal policies: (i) government purchases, (ii) income tax cuts, (iii) unemployment insurance benefits, (iv) unconditional transfers, and (v) liquidity ...
Taxonomy of Global Risk, Uncertainty, and Volatility Measures
A large number of measures for monitoring risk and uncertainty surrounding macroeconomic and financial outcomes have been proposed in the literature, and these measures are frequently used by market participants, policy makers, and researchers in their analyses. However, risk and uncertainty measures differ across multiple dimensions, including the method of calculation, the underlying outcome (that is, the asset price or macroeconomic variable), and the horizon at which they are calculated. Therefore, in this paper, we review the literature on global risk, uncertainty, and volatility ...
Managing Capital Flows in the Presence of External Risks
We introduce external risks, in the form of shocks to the level and volatility of world interest rates, into a small open economy model subject to the risk of sudden stops?large recessions together with abrupt reversals in capital inflows| and characterize optimal macroprudential policy in response to these shocks. In the model, collateral constraints create a pecuniary externality that leads to "overborrowing" and sudden stops that arise when the constraints bind. The typical sudden stop generated by the model replicates existing empirical evidence for emerging market economies: Low and ...
Optimal Public Debt with Life Cycle Motives
Public debt can be optimal in standard incomplete market models with infinitely lived agents, since the associated capital crowd-out induces a higher interest rate. The higher interest rate encourages individuals to save and, hence, better self-insure against idiosyncratic labor earnings risk. Even though individual savings behavior is a crucial determinant of the optimality of public debt, this class of economies abstracts from empirically observed life cycle savings patterns. Thus, this paper studies how incorporating a life cycle affects optimal public debt. We find that while the ...
How Much has Wealth Concentration Grown in the United States? A Re-Examination of Data from 2001-2013
Well known research based on capitalized income tax data shows robust growth in wealth concentration in the late 2000s. We show that these robust growth estimates rely on an assumption---homogeneous rates of return across the wealth distribution---that is not supported by data. When the capitalization model incorporates heterogeneous rates of return (on just interest-bearing assets), wealth concentration estimates in 2011 fall from 40.5% to 33.9%. These estimates are consistent in levels and trend with other micro wealth data and show that wealth concentration increases until the Great ...
An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the US
We evaluate the economic costs and benefits for bank capital levels in the United States. The framework and analysis is similar to that found in previous studies though we tailor the analysis to the specific features and experience of the U.S. financial system and account for the impact of new financial regulations. The conceptual framework identifies the benefits of bank capital with a lower probability of financial crises, which result in decreased economic output. The costs of bank capital are identified with increases in banks cost of funding, which are passed along to borrowers and ...
Small and orthodox fiscal multipliers at the zero lower bound
Does fiscal policy have large and qualitatively different effects on the economy when the nominal interest rate is zero? An emerging consensus in the New Keynesian literature is that the answer is yes. New evidence provided here suggests that the answer is often no. For a broad range of empirically relevant parameterizations of the Rotemberg model of costly price adjustment, the government purchase multiplier is about one or less, and the response of hours to a tax cut is either negative or close to zero.
Impacts of COVID-19: Mitigation Efforts versus Herd Immunity
The rapid spread of COVID-19 is having devastating effects on the global economy. With death curves beginning to bend, governments will soon need to determine when and how to relax lockdown measures. The crucial question is: what are the public health consequences of reopening the economy? In this article, we argue that the observed decline in daily deaths could be due to two scenarios: social distancing measures and herd immunity. Both the widely used SIR model and the data collected thus far cannot distinguish these two scenarios. Such an identiﬁcation problem generates a large degree of ...
Money in the Production Function
Businesses hold large quantities of cash reserves, which have average returns well below their investments in tangible capital. Businesses do this because these monetary assets provide services. One implication is that money services is a factor of production in capital theoretic valuation equilibrium models. Our aggregate production function is consistent with both the classical demand for money function relationship and with extended periods of near zero short-term nominal interest rates. In our model economy, there is a 100 percent reserve requirement on all demand deposits. Demand ...