Research

Working Papers:

Heterogeneous Spillovers of Housing Credit Policy NEW VERSION! (Under Review)

Abstract:

We study the spillovers from government intervention in the mortgage market on households' consumption. After an expansionary mortgage market operation, the consumption response of homeowners with mortgage debt is large and significant, while the consumption response of homeowners without the mortgage debt is small and insignificant. Non-homeowners also increase their consumption but less than mortgagors. We also find that expansionary policy significantly increases consumption inequality of mortgagors. We explain these facts through the lens of a life-cycle model with incomplete markets and endogenous housing choice. Reduction in credit rates creates extra wealth for the mortgagors while reduction in interest rates shifts this wealth towards consumption. Increase in wealth is bigger for those with larger mortgage- this exacerbates consumption inequality.

Banco de España WP version here. Latest slides available here.


The Resolution of Long-Run Risk (Under Review)

- with Raffaele Rossi and Klaus Reiner Schenk-Hoppé

Abstract:

Long-run risk models, a cornerstone in the macro-finance literature for their ability to capture key asset price phenomena, are known to entail implausibly high levels of timing and risk premia. Our paper addresses this puzzle by considering consumption of durable goods in addition to that of non-durable goods. In our estimated model, timing and risk premia are 11 and 16 percent of lifetime consumption, respectively. These values are about a third of the previously implied premia and are more consistent with the empirical and the experimental evidence.

Latest slides available here.


Whoever Has Will Be Given More: Child Endowment and Human Capital Investment (New Draft Coming Soon)

- with Liyousew G. Borga

Abstract:

Using a unique longitudinal survey from Ethiopia, this paper investigates whether resource constrained parents reinforce or attenuate differences in early abilities between their children. To overcome the potential endogeneity associated with measures of endowment, we construct a measure of human capital at birth that is plausibly net of prenatal investments. Furthermore, we estimate a sibling fixed-effects model to reduce the bias due to unobserved family-specific heterogeneity. We find that parents reinforce educational inequality, as inherently healthy children are more likely to attend preschool, be enrolled in elementary school, and have more expenses incurred towards their education. Health inputs, on the other hand, are allocated in a compensatory manner.


Consumer Sentiment, Durable Consumption, and Stock Returns (Under Review)

Abstract:

Using the Michigan Survey of Consumers, we provide evidence that consumers' beliefs about current and future aggregate durable expenditure predicts expected returns. We rationalize this finding through an asset pricing model with recursive preferences over non-durable and durable goods and belief formation through Bayesian learning. We estimate the model to match standard macroeconomic and financial moments. Expectations about future consumption growth enter the stochastic discount factor of the economy through consumers' intertemporal marginal rate of substitution. This generates the predictability of beliefs for all future asset returns.

Latest slides available here.

Work in Progress:

The Long-Run Effects of Marginal Tax Changes across Time (Draft Coming Soon)

- with Patrick Macnamara and Raffaele Rossi

Abstract:

Within an estimated life-cycle model with labor and capital income risk, we calculate that the dollar-on-dollar, long-run, marginal tax rate multiplier is 1.69 in 2016. This same multiplier is 3.25 in 1983. The implied long-run elasticity of taxable income to the net of average marginal tax rate is around 0.91 in 1983 and 0.61 in 2016. The effects of tax policies are larger in 1983 than in 2016 along the whole distribution of income but even more so for the richest 1 percent. These differences are driven by the general equilibrium effects of the increased dispersion of labor productivity, the decline in the progressivity of the income tax schedule, and the concentration of wealth. Our estimates indicate that: (i) the long-run effects of marginal tax changes are sizeable on GDP and taxable income; (ii) the transmission mechanism of tax policy has substantially weakened in the US since the early 1980s; and (iii) the distributional characteristics of the economy and of the tax system are crucial for long-run policy evaluation.


The Role of Parental Investment for Human Capital Formation, Happiness and Adverse Behavior (Draft Coming Soon)

- with Liyousew G. Borga

We formulate and structurally estimate multistage production functions for children's cognitive, noncognitive and health endowments from birth until age 14, using Millennium Cohort Study from the UK. The inputs into the production functions include parental background, prior child endowments, and parental investments. Our estimation is based on a nonlinear factor model, using multiple measurements for inputs and child endowments. We consider the role of two different parental investment behaviors: parenting style and material investment. Our results show that positive parenting is associated with better human capital outcomes at younger ages while material investment is more productive at later ages. We also characterize the nature of persistence (self- and cross-productivities) and dynamic complementarities between the three components of human capital. We also estimate the role of child endowments on teenage behaviour. Adverse behavior (smoking, drinking, drug use) are associated with lower cognitive and noncognitive skills at younger ages, as well as lower parental investment; we find the opposite results for teenage subjective wellbeing.


Housing Tenure and Household Debt: Life-Cycle Dynamics During a Boom and Bust

- with Julio Gálvez and Clodomiro Ferreira


Uncertainty and Inequality

- with Patrick Macnamara, Anh D. M. Nguyen and Raffaele Rossi


Skill Begets Skill: A Dynamic Analysis of the Determinants of Skill Formation

- with Liyousew G. Borga