Research

Working Papers


When Household Heterogeneity Matters - Optimal Fiscal Policy in a Medium-Scale TANK Model

    • LIDAM Discussion Paper - April 2022 [PDF]


We investigate the role of household heterogeneity in terms of marginal propensity to consume and of labor income for the design of optimal fiscal policy over the business cycle. We estimate a two agent New-Keynesian (TANK) medium scale model introducing aggregate shocks as in Smets and Wouters (2007) and allowing idiosyncratic shocks to impact household behavior. We further ensure that the government can set lump sum transfers and distortionary taxes to redistribute across households and finance deficit fluctuations across the business cycle. Estimating the model with US data on household earnings shows limited influence on the estimated parameters of the model, however it identifies heterogeneity across household types as a key driving force of the business cycle. Using the estimated model we solve an optimal fiscal policy problem assuming that a benevolent government sets taxes and transfers under commitment. Under optimal policy, fiscal variables display considerable volatility and respond considerably to shocks to labor income at the low end of the distribution. These shocks are also important for the optimal policy model to match the properties of fiscal variables seen in the US data.


Optimal Taxes and Transfers with Household Heterogeneity, with B. Chafwehé.

    • LIDAM Discussion Paper - April 2021 [PDF]


We investigate the properties of optimal fiscal policy in a framework where household heterogeneity is accounted for. The Ramsey planner chooses (distortionary) labor taxes and transfers to maximize aggregate welfare in a two-agent economy. We contrast the properties of optimal labor taxes in our model to the ones obtained in the representative agent counterpart. We first show that the presence of household heterogeneity introduces an additional source of fluctuations in the optimal tax rate, as varying taxes allows the planner to use transfers for redistributive purposes. We then show that, depending on the assumptions that are made on how transfer receipts are distributed among households, and the type of shocks hitting the economy, the structure of government bond markets becomes more or less important in shaping the dynamics of the Ramsey allocation. In some cases, the presence of transfers brings the incomplete markets allocation close to the one in which the planner has access to state-contingent claims. We finally show that the presence of heterogeneity and optimal transfers helps bring the behaviour of fiscal variables in the Ramsey model closer to their counterpart in US data.


World Interest Rates and Macroeconomic Adjustments in Developing Commodity Producing Countries, with V. Bodart and E. Perego.

    • LIDAM Discussion Paper - February 2021 [PDF]


With commodities becoming international financial securities, commodity prices are affected by the international financial cycle. With this evidence in mind, this paper reconsiders the macroeconomic adjustment of developing commodity-exporting countries to changes in world interest rates. We proceed by building a model of a small open economy that produces a non-tradable good and a storable tradable commodity. The difference with standard models of small open economies lies in the endogenous response of commodity prices which -due to commodity storage- adjust to variations in international interest rates. We find that the endogenous response of commodity prices amplifies the reaction of commodity exporting countries to international monetary shocks. This suggests that commodity exporting countries are more vulnerable to unfavourable international monetary disturbances than other small open economies. In particular, through the commodity price channel, even those small open commodity-exporting economies that are disconnected from international financial markets can be affected by the international financial cycle..



What do we Teach in Macroeconomics? Evidence from a Theoretical Divide, with M. De Vroey and R. Turati

    • LIDAM Discussion Paper - September 2021 [PDF]


This paper studies the way in which macroeconomics is taught at the undergraduate and graduate levels. Based on two sources of information, the world’s largest network of library content and services, the WorldCat data base, and a survey of the textbooks used for teaching at leading universities across the world, the paper provides an up-to-date description of macroeconomics teaching. Our results show a clear methodological divide: whereas IS-LM/AS-AD modeling is the theoretical core of undergraduate textbooks, graduate ones have the RBC model as their baseline model.


Work in Progress

  • International Spillovers of US Monetary Policy Throughout the Commodity Price Channel.

  • Content and Methodological Choices in Undergraduate Macroeconomics Textbooks, with M. De Vroey and R. Turati.