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Working Paper
The Nonlinear Effects of Fiscal Policy
Brinca, Pedro; Holter, Hans; Faria-e-Castro, Miguel; Ferreira, Miguel H. (2021-01-15)
We argue that the fiscal multiplier of government purchases is nonlinear in the spending shock, in contrast to what is assumed in most of the literature. In particular, the multiplier of a fiscal consolidation is decreasing in the size of the consolidation. We empirically document this fact using aggregate fiscal consolidation data across 15 OECD countries. We show that a neoclassical life-cycle, incomplete markets model calibrated to match key features of the U.S. economy can explain this empirical finding. The mechanism hinges on the relationship between fiscal shocks, their form of ...
Working Papers , Paper 2019-015

Working Paper
Adverse Selection, Risk Sharing and Business Cycles
Veracierto, Marcelo (2014-10-22)
I consider a real business cycle model in which agents have private information about an idiosyncratic shock to their value of leisure. I consider the mechanism design problem for this economy and describe a computational method to solve it. This is an important contribution of the paper since the method could be used to solve a wide class of models with heterogeneous agents and aggregate uncertainty. Calibrating the model to U.S. data I find a striking result: That the information frictions that plague the economy have no effects on business cycle fluctuations.
Working Paper Series , Paper WP-2014-10

Working Paper
Beliefs, Aggregate Risk, and the U.S. Housing Boom
Jacobson, Margaret M. (2022-09-23)
Endogenously optimistic beliefs about future house prices can account for the path and standard deviation of house prices in the U.S. housing boom of the 2000s. In a general equilibrium model with incomplete markets and aggregate risk, agents form beliefs about future house prices in response to shocks to fundamentals. In an income expansion with looser credit conditions, agents are more likely to underpredict house prices and revise up their beliefs. Matching the standard deviation and steady rise in house prices results in homeownership becoming less affordable later in the boom as well as ...
Finance and Economics Discussion Series , Paper 2022-061

Working Paper
Monetary Policy with Racial Inequality
Nakajima, Makoto (2023-04-19)
I develop a heterogeneous-agent New-Keynesian model featuring racial inequality in income and wealth, and studies interactions between racial inequality and monetary policy. Black and Hispanic workers gain more from accommodative monetary policy than White workers mainly due to higher labor market risks. Their gains are larger also because of a larger proportion of them are hand-to-mouth, while wealthy White workers gain more from asset price appreciation. Monetary and fiscal policies are substitutes in providing insurance against cyclical labor market risks. Racial minorities gain even more ...
Opportunity and Inclusive Growth Institute Working Papers , Paper 070

Working Paper
The Nonlinear Effects of Fiscal Policy
Brinca, Pedro; Holter, Hans; Faria-e-Castro, Miguel; Ferreira, Miguel H. (2019-05-22)
We argue that the fiscal multiplier of government purchases is increasing in the spending shock, in contrast to what is assumed in most of the literature. The fiscal multiplier is largest for large positive government spending shocks and smallest for large contractions in government spending. We empirically document this fact using aggregate U.S. data. We find that a neoclassical, life-cycle, incomplete markets model calibrated to match key features of the US economy can explain this empirical finding. The mechanism hinges on the relationship between fiscal shocks, their form of financing, ...
Working Papers , Paper 2019-15

Working Paper
Fertility Choice in a Life Cycle Model with Idiosyncratic Uninsurable Earnings Risk
Sommer, Kamila (2014-04-04)
This paper studies the link between rising income uncertainty and household fertility patterns in an Aiyagari-Bewley-Huggett framework augmented to include fertility decisions and infertility risk. Building on Becker and Tomes (1976), I model fertility decisions as sequential, irreversible choices over the number of children, accompanied by parental choices of time and money invested toward improving children's quality. The calibrated model is used to quantify the contribution of earnings uncertainty to the changes in the key fertility indicators between steady states. I show that realistic ...
Finance and Economics Discussion Series , Paper 2014-32

Working Paper
Capital Income Taxation with Housing
Nakajima, Makoto (2020-01-07)
This paper quantitatively investigates capital income taxation in the general-equilibrium overlap-ping generations model with household heterogeneity and housing. Housing tax policy is found to aﬀect how capital income should be taxed, due to substitution between housing and non-housing capital. Given the existing U.S. preferential tax treatment for owner-occupied housing, the optimal capital income tax rate is close to zero (1%), contrary to the high optimal capital income tax rate found with overlapping generations models without housing. A low capital income tax rate improves welfare by ...
Working Papers , Paper 20-02

Working Paper
Generational War on Inflation: Optimal Inflation Rates for the Young and the Old
Fujiwara, Ippei; Hori, Shunsuke; Waki, Yuichiro (2019-11-19)
How does a grayer society affect the political decision-making regarding inflation rates? Is deflation preferred as a society ages? In order to answer these questions, we compute the optimal inflation rates for the young and the old respectively, and explore how they change with demographic factors, by using a New Keynesian model with overlapping generations. According to our simulation results, there indeed exists a tension between the young and the old on the optimal inflation rates, with the optimal inflation rates differing between generations. The rates can be significantly different ...
Globalization Institute Working Papers , Paper 372

Working Paper
Health-care reform or labor market reform? A quantitative analysis of the affordable care act
Tuzemen, Didem; Nakajima, Makoto (2015-09-16)
An equilibrium model with firm and worker heterogeneity is constructed to analyze labor market and welfare implications of the Patient Protection and Affordable Care Act, commonly called the Affordable Care Act (ACA). The authors? model implies a significant reduction in the uninsured rate from 22.6 percent to 5.6 percent. The model predicts a moderate positive welfare gain from the ACA because of the redistribution of income through health insurance subsidies at the exchange as well as the Medicaid expansion. About 2.1 million more part-time jobs are created under the ACA at the expense of ...
Working Papers , Paper 15-34

Working Paper
Regional Consumption Responses and the Aggregate Fiscal Multiplier
Karabarbounis, Marios; Dupor, Bill; Mehkari, M. Saif; Kudlyak, Marianna (2018-02-20)
We use regional variation in the American Recovery and Reinvestment Act (2009-2012) to analyze the effect of government spending on consumer spending. Our consumption data come from household-level retail purchases in Nielsen and auto purchases from Equifax credit balances. We estimate that a $1 increase in county-level government spending increases consumer spending by $0.18. We translate the regional consumption responses to an aggregate fiscal multiplier using a multi-region, New Keynesian model with heterogeneous agents and incomplete markets. Our model successfully generates the ...
Working Paper , Paper 18-4

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