Research
Publications
Tax Revenues in Low-Income Countries, joint with Xuan Tam, Xin Tang, and Marina M. Tavares, The Economic Journal, Volume 133, Issue 653, July 2023.
We quantitatively investigate the welfare costs of increasing tax revenues in low-income countries. The analysis is based on a model featuring heterogeneous agents, incomplete financial markets, and rural and urban areas with different sectoral composition. Because of limited labor mobility, the incidence of higher taxes tends to fall disproportionately on the rural population, regardless of the instrument. This is most acute for consumption taxes.
A Model of Price Swings in the Housing Market, joint with Carlos Garriga and Rody Manuelli, American Economic Review, 2019, Vol 109(6).
We revisit the connection between changes in interest rates, maximum loan-to-value ratios and expectations in influencing housing prices in a setting in which the stock of housing can be used as collateral for borrowing and credit markets are segmented. Changes in interest rates and credit conditions can generate significant price swings. Contrary to conventional wisdom, we show that standard asset pricing formulas seem to correctly describe the behavior of house prices
Accuracy of simulations for stochastic dynamic models, joint with Manuel Santos. Econometrica, Vol. 73 (6), November 2005, Pages 1939-1976.
Quantifying the Shadow Economy: Measurement with Theory, joint with Pere Gomis-Porqueras and Chris Waller, Journal of Economic Dynamics and Control, April 2014.
We construct a dynamic, general equilibrium model of tax evasion where agents choose to report some of their income. Trade using cash to avoid taxes is the theoretical measure of the shadow economy from our model. We then calibrate our model to back out the size of the shadow economy for a sample of 30 countries and compare our estimates to traditional ad hoc estimates. Our results generate reasonably larger estimates than exist in previous literature.
Numerical Simulation of Nonoptimal Dynamic Equilibrium Models, joint with Jianjun Miao, Zhigang Feng, and Manuel Santos, International Economic Review, February 2014.
We present a recursive method for the numerical simulation of nonoptimal dynamic equilibrium models. It builds upon a convergent operator over an expanded set of state variables. The fixed point of this operator defines the set of all Markovian equilibria. We study approximation properties of the operator as well as the convergence of the moments of simulated sample paths. We apply our numerical algorithm to various models.
Analysis of Numerical Errors, joint with Manuel Santos, in Handbook of Computational Economics, Volume III, editors: Ken Judd, Karl Schmedders, North-Holland, 2014.
Oil Crisis, Energy-Saving Technological Change and the Stock Market Crash of 1973-1974, joint with Sami Alpanda, Review of Economic Dynamics, April 2010.
We simulate a calibrated dynamic general equilibrium model, where firms adopt energy-saving technologies along with the rise in energy prices, and the value of their installed capital falls due to investment irreversibility. We find that this channel can account for a third of the decline in Tobin's q observed in the data. We also consider the role of subsidies to expedite the adoption of energy-saving technologies. The model can account for more than half of the decline in q.
Problems in the Numerical Simulation of Models with Heterogeneous Agents and Economic Distortions, joint with Manuel Santos, Journal of the European Economic Association, Vol. 8 (2-3), April 2010, Pages 617-625.
Recent research points to the inherent difficulties in the computation of competitive equilibria for dynamic economies with heterogeneous agents and economic distortions. We consider a reliable algorithm set forth in Feng et al. (2009). We offer new insights into numerical simulation.
Optimal Monetary and Fiscal Policies in a Search Theoretic Model of Monetary Exchange, joint with Pere Gomis-Porqueras, European Economic Review, Vol. 54 (3), April 2010, Pages 331-344.
We study the properties of optimal fiscal and monetary policy within the framework of Lagos and Wright (2005). We show that fiscal policy can be implemented to alleviate underproduction while money is still essential. Fiscal policy still results in substantial welfare gains.
The Information Technology Revolution and the Puzzling Trends in Tobin's average q, International Economic Review, Vol. 48 (3), August 2007, Pages 929-951.
Comment on "Growth cycles and market crashes," Journal of Economic Theory, Volume 111 (1), July 2003, Pages 147-148.
Working Papers
Costly Increses in Public Debt when r<g, joint with Yongquan Cao and Vitor Gaspar, 2023.
This paper quantifies the costs of a permanent increase in debt to GDP. We employ a deterministic, general equilibrium, overlapping generations environment with two assets. Namely, public debt and private capital. We assume the interest rate on public debt equals the rate of return on private capital minus an exogenously determined convenience yield. A simple overlapping generations model shows that a permanent, unexpected, increase in debt to GDP crowds out private investment and reduces potential output, even if r<g. We then consider a realistic version of the model and calibrate it to the United States. We make the model match the gradual average increase in debt to GDP observed during the last 20 years. The costs of higher debt can be as large as an 8 percent permanent reduction in GDP.
High Public Debts: Bad Policy of Bad Luck, joint with Nikhil Patel, 2023 (to be presented at the SED 2023).
The COVID-19 pandemic and a persistent upward trend since the post-war period have led to historically high public debt-to-GDP ratios by 2020. To delve into the causes of this, we utilize a structural vector autoregression (SVAR) framework incorporating real GDP growth, the debt-to-GDP ratio, primary balance, the effective interest rate, and inflation in a sample of emerging and advanced economies. Our analysis using narrative sign restrictions for identification highlights that luck, represented by a combination of demand and supply growth shocks, is the primary contributor to debt-to-GDP fluctuations, accounting for approximately half of the yearly unexpected variation. In contrast, discretionary policy shocks explain only one-fifth of the unexpected variations. Moreover, our results demonstrate that discretionary primary balance consolidations, while reducing the debt-to-GDP ratio, do not negatively impact growth on average.
On Financing Retirement, Health, and Long-Term Care in Japan, 2018, joint with Ellen McGrattan and Kazuaki Miyachi.
Japan faces the problem of how to finance retirement, health, and long-term care expenditures as the population ages. This paper analyzes the impact of policy options intended to address this problem by employing a dynamic general equilibriumoverlapping generations model, specifically parameterized to match both the macroeconomic and microeconomic level data of Japan. We find that financing the costs of aging through gradual increases in the consumption tax rate delivers a bettermacroeconomic performance and higher welfare for most individuals than other financing options, including those of raising social security contributions, debtfinancing, and a uniform increase in health and long-term care copayments. (JEL H51, H55, I13, E62 )
Macroeconomic and Distributional Effects of Personal Income Tax Reforms : A Heterogenous Agent Model Approach for the U.S, joint with Damien Puy and Sandra Lizarazo Ruiz.
This paper assesses the macroeconomic and distributional impact of personal income tax (PIT) reforms in the U.S. drawing on a multi-sector heterogenous agents model in which consumers have non-homothetic preferences and sectors differ in terms of their relative labor and skill intensity. The model is calibrated to key characteristics of the US economy. We find that (i) PIT cuts stimulate growth but the supply side effects are never large enough to offset the revenue loss from lower marginal tax rates; (ii) PIT cuts do “trickle-down” the income distribution: tax cuts stimulate demand for non-tradable services which raise the wages and employment prospects of low-skilled workers even if the tax cut is not directly incident on them; (iii) A revenue neutral tax plan that reduces PIT for middle-income groups, raises the consumption tax, and expands the Earned Income Tax Credit can have modestly positive effects on growth while reducing income polarization; (iv) The growth effects from lower income taxes are concentrated in non-tradable service sectors although the increased demand for tradable goods generate positive spillovers to other countries; (v) Tax cuts targeted to higher income groups have a stronger growth impact than tax cuts for middle income households but significantly worsen income polarization, even after taking into account trickle-down effects and an expansion of the Earned Income Tax Credit.
Sectoral Shocks, Reallocation Frictions, and Optimal Government Spending, joint with Rody Manuelli.
What is the optimal policy response to a negative sectoral shock? How do frictions in goods and labor markets affect the nature and speed of the process of reallocating resources across alternative uses? Should government controlled inputs be allocated to compensate for frictions faced by the private sector or, rather, should they be deployed to complement private sector decisions? In this paper we make a first attempt to understand what features of an economy determine the answers to the previous questions. We study a model in which the drop in the private demand for structures frees up resources that can be used to produce government capital. For a reasonable calibration, we find that government spending increases in response to the drop in private demand, but that the size of the increase is inversely related to the level of frictions: the 1 larger the costs that the economy faces to reallocate resources (capital and labor) across sectors, the smaller the optimal level of government spending.
Reconstructing the Great Recession, joint with Michele Boldrin, Carlos Garriga and Juan Sanchez.
This paper evaluates the role of the construction sector in accounting for the performance of the U.S. economy in the last decade. During the Great Recession (2008-09), employment in the construction sector experienced an unprecedented decline that followed the largest expansion in total employment since the 1950s. Despite the small size of the construction sector, its interlinkages with other sectors in the economy propagate the effect from changes in the demand of residential investment, hence amplifying the effect on the overall economy. An input-output analysis reveals that the construction sector has been an important driver of the dynamics of aggregate employment and output of the U.S. economy through the sectorial interlinkages. The importance of interlinkages is illustrated in a static model and then quantified in a generalized framework that includes fixed and residential investment. The model is calibrated to reproduce the boom-bust dynamics of construction employment in the period 2000-10. We find that construction and its interlinkages account for a large share of the actual changes in aggregate employment and gross domestic product during the expansion and the recession. Through the lens of the standard business cycle accounting, the recession generated in the model, as in the data, is due to the worsening of the labor wedge.