Working Papers

Stimulus Contract. 2023.

Abstract: This paper takes a mechanism design approach to stabilization policy with the presence of unobserved household heterogeneity. We study the policy space of fiscal stimulus in managing aggregate demand. The fiscal authority sells interest-bearing digital currencies to households to be delivered at different periods. The possibility of screening depends on market incompleteness. The boundary of the aggregate demand possibilities frontier features equating mechanism-dependent marginal propensity to consume. We consider heterogeneity in discount factor, elasticity of intertemporal substitution, income risks, and wealth.

Consumption Responses to the Realization of One-Time Income Changes: A Preferred Salience Hypothesis. 2022.

Abstract: This paper proposes a Preferred Salience Hypothesis, where with the realization of income changes, households are salience-seeking in the pleasure of gains, and salience-averse in the pain of losses. Under this hypothesis, households have both consumption smoothing motive and preferred salience motive, and it predicts a pattern of asymmetric consumption smoothing: households respond excessively to the realization of a one-time income gain whereas the response to the realization of a one-time income loss is muted.