Research

Published and Accepted Papers:

Inflation, Fiscal Policy, and Inequality: The Impact of the Post-Pandemic Price Surge and Fiscal Measures on European Households (Review of Income and Wealth, 2024)

- with Antonio F. Amores, Henrique S. Basso, Johannes Simeon Bischl, Paola de Agostini, Silvia De Poli, Emanuele Dicarlo, Maria Flevotomou, Maximilian Freier, Sofia Maier, Esteban García-Miralles, Mattia Ricci, and Sara Riscado

Abstract:

Following the inflation surge in the aftermath of the pandemic crisis, Euro Area governments adopted a large array of fiscal measures to cushion its impact on households. The inflationary shock and related fiscal measures affected households differently depending on their country, their consumption patterns, and their position in the income distribution. This paper uncovers the aggregate and distributional impact of this inflationary shock, as well as the impact of the government measures aimed at supporting households and containing prices. The analysis is carried out for 2022 and includes Germany, France, Italy, Spain, Portugal, and Greece. Our work confirms that the purchasing power and welfare of low-income households was more severely affected than that of high-income households. Fiscal measures contributed significantly to closing this gap, though with country differences. However, most fiscal measures were not particularly targeted at low-income households, implying a low cost-effectiveness in protecting the poorest in some countries.

[ ECB Occasional Paper  | Banco de España Occasional Paper | SUERF Policy Brief ]

Marginal Tax Rates and Income in the Long Run: Evidence from a Structural Estimation (Journal of Monetary Economics, 2024)

- with Patrick Macnamara and Raffaele Rossi 

Abstract:

We estimate a life-cycle model of savings, labor productivity and entrepreneurs to measure the long-run response of income to marginal tax rate cuts in the US. Long-run tax elasticities of income are largest for the richest 1% but are also positive and substantial for other income groups. In equilibrium, entrepreneurs obtain higher returns on wealth. This increases the investment response of rich, high-return entrepreneurs, amplifying their income elasticity to tax cuts. This leads to a reallocation of capital which increases TFP, and generates a boost in wages that magnifies the estimated income response of the bottom 90% as well.

[ pdf | online appendix | Banco de España Working Paper ]

How Consumption Carbon Emission Intensity Varies Across Spanish Households (SERIEs, 2024)

- with Henrique S. Basso and Ourania Dimakou

Abstract:

The prominence of emissions mitigating policies call for an understanding of their potential distributional impact. To assess this heterogeneity, we quantify and analyse the consumption emission intensity, defined as carbon emissions per unit of consumption, across households in Spain. With the exception of the poorest households, emission intensity decreases with income and peaks for households whose head is middle-aged (40 years old). Moreover, households whose main earner is less educated and male, and who live in smaller cities and rent their main residence, also emit more per unit of expenditure and thus, may be disproportionably impacted by emissions mitigating policies.

[ pdf | Bando de España Occasional Paper | replication materials ]

Heterogeneous Spillovers of Housing Credit Policy (Review of Economic Dynamics, 2023)

Abstract:

We study the spillovers from government intervention in the mortgage market on households' consumption. Expansionary credit policy increases the consumption of homeowners with mortgage debt significantly, while the consumption response of homeowners without mortgage debt is small and insignificant. Non-homeowners also increase their consumption but less than mortgagors. We also find heterogeneous responses of households of different ages. We explain these facts through a life-cycle model with incomplete markets and endogenous housing choice. Downward pressure on the credit and interest rates creates extra wealth for the mortgagors via the refinancing channel.

[ pdf | online appendix | Banco de España Working Paper | replication materials ] 

How Inflation Varies Across Spanish Households (ICE, Revista De Economía, 2022)

- with Henrique S. Basso and Ourania Dimakou

Abstract:

Inflation has distributional effects. Leveraging data on consumption expenditure of goods across households provided in the Spanish Household Budget Survey we estimate household-specific inflation from 2006 to 2021 in Spain and analyse how it varies according to households' known characteristics. We show that households with lower income, more members and whose head is less educated, older, and male experience higher inflation. Finally, we also depict the effects of the most recent price increases across households.

[ Bando de España Occasional Paper ]

Working Papers:

Taxing Consumption in Unequal Economies  (Revise and Resubmit at Journal of Political Economy Macroeconomics)

- with Patrick Macnamara and Raffaele Rossi 

This paper shows that linear consumption taxes are a powerful tool to implement efficient redistribution. We derive this result in a quantitative life-cycle economy that reproduces the distribution of income and wealth in the United States. Optimal policy calls for raising all fiscal revenues from consumption, and providing redistribution via a highly progressive wage tax schedule. Capital income and wealth should not be taxed. This policy reduces inequality and increases productivity, and brings large welfare gains relative to the status-quo. Around two-thirds of these gains are due to redistribution. Finally, our reform is also welfare improving in the short-run.

[ pdf | Banco de España working paper ] 

Opening the Black Box: Aggregate Implications of Public Investment Heterogeneity - NEW PAPER!

- with Henrique S. Basso and Omar Rachedi 

Aggregate implications of public investment crucially depend on its composition between structures, equipments, and intellectual property products. We show that abstracting from heterogeneity in public investment composition leads to an downward bias of the elasticity of private output to public capital.  We introduce the three types of public investment  into an  otherwise standard New Keynesian economy  and find that heterogeneity in public investment composition roughly doubles the optimal level of public investment and the output multiplier. Feeding the model with actual variation in public investment composition both over time and across government levels leads to large changes in the multiplier.

[ pdf ]

Housing Tenure and Household Debt: Life-Cycle Dynamics During a Boom and Bust  - DRAFT NOW AVAILABLE!

- with Julio Gálvez and Clodomiro Ferreira 

The housing bust in Spain was characterized by a significant and rapid drop in home ownership among the younger cohorts, a relatively homogeneous but significant decrease in consumption, and significant movements in the rent-to-house price ratio. To uncover the causes of these movements, we solve and estimate an equilibrium life-cycle model with non-linear income dynamics, mortgages, housing, and rental markets and simulate a series of counterfactual policy changes and macroeconomic conditions observed in Spain during the period. The lion's share of the observed drop in home ownership and consumption and the housing market dynamics can be explained by the tightening of credit conditions and the major shift in income dynamics observed in Spain between the boom and bust phases. 

[ pdf | Banco de España working paper ]

The Resolution of Long-Run Risk (Revise and Resubmit at International Economic 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.

Child Endowment and Human Capital Investment: Evidence from Ethiopia 

- 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. 

Work in Progress:

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.

The Human Capital Cost of School Closures During the Pandemic in the UK 

- with Liyousew G. Borga and Raffaele Rossi 

Climate Change and Inequality: The Welfare Effects of Carbon Tax

- with Henrique S. Basso and Omar Rachedi

Uncertainty and Inequality

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

Old Stuff:

Consumer Sentiment, Durable Consumption, and Stock Returns 

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.

[ pdf ]