Publications
Brookings Papers on Economic Activity, Spring 2023, pp. 77-157
Abstract: The Inflation Reduction Act (IRA) represents the largest US federal response to climate change to date. We highlight the key climate provisions and assess the act's potential economic impacts. Substantially higher investments in clean energy and electric vehicles imply that fiscal costs may be larger than projected. However, even at the high end, IRA provisions remain cost-effective. The IRA has large impacts on power sector investments and electricity prices, lowering retail electricity rates and resulting in negative prices in some wholesale markets. We find small quantitative macroeconomic effects, including a small decline in headline inflation, but macroeconomic conditions - particularly higher interest rates and material costs - may have substantial negative effects on clean energy investment. We show that the subsidy approach in the IRA has expansionary supply-side effects relative to a carbon tax but, in a representative-agent dynamic model, is preferable to a carbon tax only in the presence of a strong learning-by-doing externality. We also discuss the economics of the industrial policy aspects of the act as well as the distributional impacts and the possible incidence of the different tax credits in the IRA.
Press Coverage: Axios (March 30, 2023), Wall Street Journal (April 12, 2023), New York Times (May 3, 2023), Star Tribune (May 3, 2023), NY Post (May 4, 2023), New York Times (May 9, 2023), La Tribune (July 6, 2023), The Gazette (July 7, 2023), AP (July 23, 2023), Bloomberg News (October 21, 2023)
Debt Sustainability in a Low Interest Rate World (with Dmitriy Sergeyev)
Journal of Monetary Economics, Vol. 124(S), pp. S1-S18
Abstract: Historic levels of public debt and conditions of r < g for advanced economies have prompted a reassessment of debt sustainability. Using a continuous-time model in which the debt-to-GDP ratio is stochastic and r < g on average, we find that theoretical conditions for sustainability are not closely tied to common metrics of sustainability: the level of debt or whether r < g. However, when the primary surplus is bounded, a state-dependent threshold level of public debt determines sustainability. Secular stagnation factors like slow population growth, low productivity growth, or higher output risk carry differing implications for debt sustainability.
Related (prepared for the Peterson Institute of International Economics): Implications of Slow Productivity Growth for Debt Sustainability
Financial Shocks, Firm Credit and the Great Recession (with Dmitriy Sergeyev)
Journal of Monetary Economics, Vol. 117, pp. 296-315
Abstract: Using The creation and destruction margins of employment (job flows) can be used to measure the employment effects of disruptions to firm credit. Using a firm dynamics model, we establish that a tightening of credit to firms reduces employment primarily by reducing gross job creation, exhibiting stronger effects at new, young firms, and middle-sized firms. The firm credit channel accounts for, at most, 18% of the decline in US employment during the Great Recession. Using MSA-level job flows data, we show that the job flows response to identified credit shocks is consistent with our model's predictions.
Small and Large Firms over the Business Cycle (with Nicolas Crouzet)
American Economic Review, Vol. 110(11), pp. 3549-3601
Abstract: Drawing on a new, confidential Census Bureau dataset of financial statements of a representative sample of 80000 manufacturing firms from 1977 and 2014, we provide new evidence on the link between size, cyclicality, and financial frictions. First, we only find evidence of lower cyclicality among the very largest firms (the top 1% by size). Second, due to high and rising concentration of sales and investment, the lower sensitivity of the top 1% firms dominates the behavior of aggregate fluctuations. Third, we show that this differential sensitivity does not appear to be driven by financial frictions. The higher sensitivity of the bottom 99% does not disappear after controlling for measures of financial strength, is not statistically significant after identified monetary policy shocks, and does not appear in debt financing flows. Evidence from 3-digit industries suggests a non-financial explanation: the largest 1% of firms are less sensitive due to a more diversified customer base.
American Economic Journal: Macroeconomics, Vol. 11(1), pp. 1-48
Abstract: This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from −1.5% to −2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates.
Related: A Model of Secular Stagnation (with Gauti Eggertsson)
An earlier version, revised and incorporated into Eggertsson, Mehrotra and Robbins (2019)
Press Coverage: Bloomberg View (October 20, 2016); Ben Bernanke's Blog (March 31, 2015); Business Insider (January 20, 2015); Vox (October 28, 2014); Washington Post (October 23, 2014); Equitablog (October 22, 2014); Marginal Revolution (October 21, 2014); Financial Times (October 20, 2014); CNBC (August 12, 2014); The New York Times (June 11, 2014); Bloomberg View (April 21, 2014); CNBC (April 17, 2014) ; Paul Krugman Blog (April 9, 2014)
Fiscal Policy Stabilization: Purchases or Transfers?
International Journal of Central Banking, Vol. 14(2), pp. 1-49
Abstract: Both government purchases and transfers figure prominently in the use of fiscal policy for counteracting recessions. However, existing representative agent models including the neoclassical and New Keynesian benchmark rule out transfers by assumption. This paper explains the factors that determine the size of fiscal multipliers in a variant of the Curdia and Woodford (2010) model where transfers now matter. I establish an equivalence between deficit-financed fiscal policy and balanced-budget fiscal policy with transfers. Absent wealth effects on labor supply, the transfer multiplier is zero when prices are flexible, and transfers are redundant to monetary policy when prices are sticky. The transfer multiplier is most relevant at the zero lower bound where the size of the multiplier is increasing in the debt elasticity of the credit spread and fiscal policy can influence the duration of a zero lower bound episode. These results are quantitatively unchanged after incorporating wealth effects on labor supply.
IMF Economic Review, Vol. 64(4), pp. 581-634
Abstract: Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neomercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.
Press Coverage: Washington Post (July 7, 2016); Paul Krugman's Blog (June 20, 2016); Economist's View (June 7, 2016)
Secular Stagnation in the Open Economy (with Gauti Eggertsson and Lawrence Summers)
American Economic Review, Papers and Proceedings, Vol. 106(5), pp. 503-507
Abstract: Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - now characterize much of the global economy. We consider a simple two-country textbook model to examine how capital markets transmit secular stagnation and to study policy externalities across countries. We find capital flows transmit recessions in a world with low interest rates and that policies that trigger current account surpluses are beggar-thy-neighbor. Monetary expansion cannot eliminate a secular stagnation and may have beggar-thy-neighbor effects, while sufficiently large fiscal interventions can eliminate a secular stagnation and carry positive externalities.
Press Coverage: WSJ Real Time Economics Blog (April 11, 2016) WSJ Capital Account (April 20, 2016); Equitablog (June 21, 2016)
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