Macroeconomics, Labor Economics, Public Finance
"The Real Effects of Financial (Dis)Integration: A Multi-Country Equilibrium Analysis of Europe," with Indraneel Chakraborty, Rong Hai and Serhiy Stepanchuk. Forthcoming, Journal of Monetary Economics - Carnegie-Rochester-NYU conference series on public policy.
Using data from 15 European Union economies, we quantify the real effects of supply-side frictions due to financial disintegration of European countries since the 2008 financial crisis. We develop a multi-country general equilibrium model with heterogeneous countries and destination-specific financial frictions. Financial institutions allocate capital endogenously across countries, determining the cost of capital to firms and the wealth of nations. The cost of financial disintegration is reduced access to capital for firms which results in lower output. Financial disintegration leads to a 0.54% fall in output in Europe since the crisis. We also estimate benefits of further financial integration.
Fiscal multipliers appear to vary greatly over time and space. Based on VARs for a large number of countries, we document a strong correlation between wealth inequality and the magnitude of fiscal multipliers. In an attempt to account for this finding, we develop a life-cycle, overlapping-generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of OECD economies, including the distribution of wages and wealth, social security, taxes, and government debt and study how a fiscal multiplier depends on various country characteristics. We find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also to the average wealth level in the economy. These findings together help us generate a cross-country pattern of multipliers that is quite similar to that in the data.
"Accounting for Cross-Country Differences in Intergenerational Earnings Persistence: The Impact of Taxation and Public Education Expenditure". Quantitative Economics, Volume 6(2), July 2015, Pages 385-428.
I document a strong negative cross-country correlation between intergenerational earnings persistence and measures of tax progressivity- and level, and between intergenerational earnings persistence and public expenditure on tertiary education. To explain these correlations I then develop an intergenerational life-cycle model of human capital accumulation and earnings, which features, progressive taxation, public education expenditure, and borrowing constraints among the determinants of earnings persistence. I calibrate the model to US data and use it to decompose the contributions to earnings persistence from different model elements and to quantify how earnings persistence in the US changes as I introduce tax- and education expenditure policies from other countries. I find that individual investments in human capital account for 73% of the estimated intergenerational earnings persistence in the US. Taxation, through its impact on investments in human capital, can explain 50% of the variation between the US and 10 other countries, whereas borrowing constraints, which have received much attention in the literature, have a limited impact on earnings persistence.
Americans work more than Europeans. Using micro data from the United States and 17 European countries, we document that women are typically the largest contributors to the cross-country differences in work hours. We also show that there is a negative relation between taxes and annual hours worked, driven by men, and a positive relation between divorce rates and annual hours worked, driven by women. In a calibrated life-cycle model with heterogeneous agents, marriage and divorce we find that the divorce and tax mechanisms together can explain 45% of the variation in labor supply between the U.S. and the European countries.
"How Do Tax Progressivity and Household Heterogeneity Affect Laffer Curves?," with Dirk Krueger and Serhiy Stepanchuk. Revision requested by Quantitative Economics
How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax Laffer curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the Laffer curve by 6%, whereas converting to a tax system with progressivity similar to Denmark, would lower the peak by 8%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This finding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity.
Research in Progress:
"The Optimum Quantity of Capital and Debt," with Marcus Hagedorn and Yikai Wang.
"Optimal Social Insurance: Answers from Swedish Panel Data," with Andrew Griffen, Jonas Kolsrud and Serhiy Stepanchuk.