Research
Working Papers
Financial-State-Dependent Effects of House Prices on Consumption and Housing Investment
Abstract: In this paper, I show that the effects of house prices on consumption and residential investment vary with the financial conditions. I find that consumption is more responsive to house prices under tight financial conditions relative to a loose financial regime whereas the response of residential investment is mixed. To explain this new finding, I employ a life-cycle model that accounts for the financial conditions and quantitatively explore its effects. Younger households, who on average most actively engage in residential investments, show larger consumption responses to house price changes under tighter financial conditions, consistent with the aggregate empirical evidence. I rationalize this outcome by a financial-state-dependent substitution effect between consumption and residential investment due to changes in house prices, which is more pronounced among younger households.
The Welfare and Distributional Consequences of Corporate Tax Cuts in Open Economies (with Hashmat Khan, Minjoon Lee, and Raul Razo-Garcia |Revise & Resubmit at the Journal of Money, Credit and Banking)
Abstract: This paper develops an open-economy heterogeneous household model with incomplete markets to quantitatively evaluate the welfare and distributional effects---both within and across countries---of the recent corporate tax cut (Tax Cuts and Jobs Act, TCJA) in the U.S. The model allows for examining outcomes under various possibilities including the tax cut in the U.S. being permanent versus temporary and potential fiscal responses of other countries to the TCJA. The paper has three key findings. First, the TCJA is regressive in the U.S. and it has relatively more regressive outcomes in other countries. Second, whether the wealth-poor in the U.S. benefit from the TCJA or not depends on the persistence of the tax cut. Finally, when a small country reduces its corporate tax in response to the TCJA, it has a progressive distributional result in its own economy.
Abstract: Are collateral shocks the dominant source of U.S. business cycles? We show that the evidence is not strong enough to conclude that they are. Collateral shocks, as described in Becard and Gauthier (2022), which tighten bank lending standards for both households and firms, account for only 7% of the cyclical variation in output, and 1% of consumption, over the period from 1985:Q1 to 2009:Q3. During this time, lending standards for both households and firms were most closely aligned in the data. Additionally, we observe a significant dampening in the comovement between consumption and output. Through counterfactual exercises, we isolate the role of estimated collateral shocks and model parameters to explain our findings. Our results suggest that identifying a quantitatively significant financial shock, which drives the U.S. business cycle and also accounts for consumption dynamics, remains a challenging task.