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Discussion Paper
Municipal Debt Markets and the COVID-19 Pandemic
Haughwout, Andrew F.; Lieber, Matthew; Hyman, Benjamin; Cipriani, Marco; Kovner, Anna; Nee, Shawn; La Spada, Gabriele (2020-06-29)
In March, with the outbreak of the COVID-19 pandemic in the United States, the market for municipal securities was severely stressed: mutual fund redemptions sparked unprecedented selling of municipal securities, yields increased sharply, and issuance dried up. In this post, we describe the evolution of municipal bond market conditions since the onset of the COVID-19 crisis. We show that conditions in municipal markets have improved significantly, in part a result of the announcement and implementation of several Federal Reserve facilities. Yields have decreased substantially, mutual funds ...
Liberty Street Economics , Paper 20200629

Report
Understanding HANK: insights from a PRANK
Acharya, Sushant; Dogra, Keshav (2018-02-01)
We show analytically that whether incomplete markets resolve New Keynesian ?paradoxes? depends primarily on the cyclicality of income risk, rather than marginal propensity to consume (MPC) heterogeneity. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only with procyclical risk. Countercyclical risk amplifies these ?puzzles.? Procyclical risk permits determinacy under a peg; countercyclical risk generates indeterminacy even under the Taylor principle. MPC heterogeneity leaves determinacy and paradoxes qualitatively unaffected, but can change ...
Staff Reports , Paper 835

Report
Optimal Monetary Policy According to HANK
Dogra, Keshav; Challe, Edouard; Acharya, Sushant (2020-02-01)
We study optimal monetary policy in a heterogeneous agent new Keynesian economy. A utilitarian planner seeks to reduce consumption inequality, in addition to stabilizing output gaps and inflation. The planner does so both by reducing income risk faced by households, and by reducing the pass-through from income to consumption risk, trading off the benefits of lower inequality against productive inefficiency and higher inflation. When income risk is countercyclical, policy curtails the fall in output in recessions to mitigate the increase in inequality. We uncover a new form of time ...
Staff Reports , Paper 916

Working Paper
Optimal Paternalistic Savings Policies
Olea de Souza e Silva, Pedro; Moser, Christian (2019-01-10)
We study optimal savings policies when there is a dual concern about undersaving for retirement and income inequality. Agents differ in present bias and earnings ability, both unobservable to a planner with paternalistic and redistributive motives. We characterize the solution to this two-dimensional screening problem and provide a decentralization using realistic policy instruments: mandatory savings at low incomes but a choice between subsidized savings vehicles at high incomes?resembling Social Security, 401(k), and IRA accounts in the US. Offering more savings choice at higher incomes ...
Opportunity and Inclusive Growth Institute Working Papers , Paper 17

Report
Optimal Income Taxation: Mirrlees Meets Ramsey
Tsujiyama, Hitoshi; Heathcote, Jonathan (2015-01-22)
What structure of income taxation maximizes the social benefits of redistribution while minimizing the social harm associated with distorting the allocation of labor input? Many authors have advocated scrapping the current tax system, which redistributes primarily via marginal tax rates that rise with income, and replacing it with a flat tax system, in which marginal tax rates are constant and redistribution is achieved via non-means-tested transfers. In this paper we compare alternative tax systems in an environment with distinct roles for public and private insurance. We evaluate ...
Staff Report , Paper 507

Working Paper
Optimal Fiscal Policy in Overlapping Generations Models
Garriga, Carlos (2017-05-22)
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 Papers , Paper 2017-32

Working Paper
The Aggregate and Relative Economic Effects of Government Financed Health Care
Dupor, William D.; Rodrigo , Guerrero (2017-10-16)
Government-financed health care (GFHC) expenditures, through Medicare and Medicaid, have grown from roughly zero to over 7.6 percent of national personal income over the past 50 years. Recently, some analysts (e.g., the Council of Economics Advisers (2014)) have argued that an expansion of GFHC (in particular Medicaid) has large positive employment effects. Using quarterly data for 1978:Q2-2016:Q4, this paper estimates the impact of GFHC spending on prime-age employment using an instrumental variables strategy that exploits exogenous variation in Medicare spending. Our IV estimate of the ...
Working Papers , Paper 2017-27

Working Paper
Macroeconomic Effects of Government Spending in China
Wang, Xin; Wen, Yi (2013)
Government spending plays an important role in determining economic performances in China. Its macroeconomic effects are analyzed in this paper. We show that government spending in China (i) Granger-causes output, consumption and investment booms as well as inflation and (ii) has a multiplier larger than 1. The large multiplier effects are found not only in aggregate time-series data but also in panel data at the provincial level. We also provide a theoretical model and Monte Carlo analysis to rationalize our empirical findings. Our theoretical and Monte Carlo analyses support the large ...
Working Papers , Paper 2013-013

Working Paper
Optimal Ramsey Capital Income Taxation —A Reappraisal
Chien, YiLi; Wen, Yi (2017-08-18)
This paper addresses a long-standing problem in the optimal Ramsey capital taxation literature. The tractability of our model enables us to solve the Ramsey problem analytically along the entire transitional path. We show that the conventional wisdom on Ramsey tax policy and its underlying intuition and rationales do not hold in our model and may thus be misrepresented in the literature. We uncover a critical trade off for the Ramsey planner between aggregate allocative efficiency in terms of the modified golden rule and individual allocative efficiency in terms of self-insurance. Facing the ...
Working Papers , Paper 2017-24

Working Paper
Local and Aggregate Fiscal Policy Multipliers
Dupor, William D.; Rodrigo , Guerrero (2016-03-29)
In this paper, we estimate the effect of defense spending on the U.S. macroeconomy since World War II. First, we construct a new panel dataset of state-level federal defense contracts. Second, we sum observations across states and, using the resulting time series, estimate the aggregate effect of defense spending on national income and employment via instrumental variables. Third, we estimate local multipliers using the state-level data, which measures the relative effect on economic activity due to relative differences in defense spending across states. Comparing the aggregate and local ...
Working Papers , Paper 2016-4

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