Research
Job Market Paper:
Abstract:
We set up a dynamic stochastic general equilibrium model with financial frictions affecting the cost channel and an endogenously derived probability of default. We then study the effects of an expansionary government spending shock. Our exercise highlights that a positive shock to government spending, a demand-side shock, increases the cost of firms' marginal costs and hence, their loan requirements. With higher borrowing, their probability of default goes up. The commercial bank takes this into account and charges a higher finance premium, discouraging the firms from borrowing as much. This results in a lower level of economic activity. The government spending multiplier is thus, smaller when the loans are borrowed to finance working capital, instead of fixed capital. In addition, we derive the multiplier to be less than one. With a lot of start-ups borrowing to meet their day to day expenses, this result extends a plausible explanation to why during the Great Recession, the impact of government spending wasn't as large as it was expected to be.
Work in Progress
Abstract:
In this paper, we derive the optimal level of capital taxation in the presence of agents with different discount factors. We set up a real business cycle model with patient and impatient households that borrow and lend amongst themselves, as per a borrowing constraint. Our results show that if the Ramsey planner's weights on different households are such that he is indifferent between redistribution towards patient and impatient households, the borrowing constraint is not binding. Moreover, we get the classical result of zero optimal capital taxation in the distant long run. However, if the Ramsey planner chooses the borrowing constraint to be always binding, he will favor redistribution from impatient households to patient households. As time moves forward, this ultimately leads to a negative optimal tax rate on the capital returns of patient households, a contradiction to the seminal Chamley-Judd result.
- Prudential Regulation and the Zero Lower Bound (with Tobias Neumann, Francesc R. Tous, and Quynh-Anh Vo)
Abstract:
The objective of our paper is to study the costs and benefits of different prudential regulations at the ZLB. We build a theoretical framework where prudential regulation in the form of capital and liquidity requirements is necessary. Banks do not internalize how their actions affect the probability of suffering a run and the amount of losses that debt holders suffer in case of default. The safety trap can arise if there is an increase in the proportion of risk-averse savers in the economy: the equilibrium price for the safe asset is above unity, thus hitting the zero lower bound and lowering output. The rationale for liquidity regulation weakens in this situation, as banks increase their liquid assets. Nevertheless, the capital regulation may become more important depending on different parameters. Our findings suggest that we may need a time-varying liquidity regulatory framework similar to the counter-cyclical capital buffer.