Research
Research
Working Papers
Fiscal Policy at the Zero Lower Bound Without Rational Expectations
with Martin Eichenbaum and Joao Guerreiro
We address the question of how sensitive is the power of fiscal policy in the ZLB to the assumption of rational expectations. We do so through the lens of a standard NK model in which people are level-k thinkers. Our analysis weakens the case for using government spending to stabilize the economy when the ZLB binds. The less sophisticated people are, the smaller is the size of the government-spending multiplier. Our analysis strengthens the case for using tax policy to stabilize output when the ZLB is binding. The power of tax policy to stabilize the economy during the ZLB period is essentially undiminished when agents do not have rational expectations. Finally, we show that the way in which tax policy is communicated is critical to its effectiveness.
Learning Unconventional Policies: Forward Guidance with Integrated Reasoning
I develop an integrated reasoning model of expectations formation to describe how people learn the effects of novel macroeconomic policies. My model of expectations has two key elements. First, people have a limited ability to understand the general-equilibrium effects of a new policy. Second, they revise expectations when observing past errors with a process of learning in real time. To assess the empirical plausibility of the model, I estimate the response of survey-level expectations to identified forward guidance shocks. The time-series properties of forecast errors and revisions show that i) individuals immediately revise beliefs after announcements; ii) forecasts underreact to the shock; and iii) beliefs are slowly updated over time. In contrast to commonly used alternative models, I show that the predictions of my framework are consistent with this empirical evidence. I estimate parameters to match the response of forecast revisions to the policy shocks. In the estimated model, the endogenous expectations revision due to real-time learning of the effects of a forward guidance announcement accounts for 35% of the cumulative output response.
Persistent Specialization and Growth: The Italian Land Reform
with Giampaolo Lecce and Matteo Magnaricotte
Land distribution has ambiguous effects on structural transformation: large landowners can slow industrialization by reducing the local provision of education, but larger scale and local market power in labor markets might accelerate mechanization of production and reduce agricultural employment. Using a difference-in-differences design and novel data on expropriations, we study the effects of redistribution following the Italian 1950 land reform. We find that redistribution led to less industrialization, and explain this finding with a reduction in scale of operations and a more intensive use of family labor. We also show that this effect persisted for at least 50 years, consistently with models of intergenerational transmission, which are also supported by survey evidence on father-son occupations. Finally, using newly digitized municipal-level income data, we find that expropriated areas had lower growth in the period 1970-2000.
An Assignment Microfoundation for Aggregate Production Functions (draft available upon request)
with MartĂ Mestieri
We develop a theory of aggregate production functions that characterizes the equilibrium aggregate output across heterogeneous production units under a general class of assignment models. We provide sufficient conditions for preservation of the micro-production function at the macro-level. Our formulation delivers sharp predictions for the relationship between micro-level parameters, the aggregate bias of technological progress and the aggregate elasticity of substitution across aggregate factors. We use our model to investigate the relationship between changes in aggregate factors shares and the underlying distribution of production.
Work in Progress
Intangible Capital and the Composition of Financial Covenants
Data on US syndicated loans over the last 20 years show a steep decline in the use of financial covenants based on capital structure information (capital covenants), such as maximum debt-to-asset ratio. I document a negative relationship between the use of capital covenants and intangible capital intensity. Motivated by this evidence, I develop a dynamic model of the firm with tangible and intangible assets, long-term debt, and covenant choice. Covenants alleviate the commitment problem that arises from debt overhang, but covenant violations are costly for the firm. Intangibles reduce the informativeness of financial distress measures based on tangible assets: a capital covenant violation in a high-intangible firm is likely to occur even when the firm is away from the default boundary. So, capital covenants are less preferred by high-intangible firms. I use the model to assess the impact of the rise of intangible assets on the interaction between financial frictions and the transmission of aggregate shocks.