Search Results
Working Paper
Capital Gains Taxation and Investment Dynamics
This paper quantifies the long-run effects of reducing capital gains taxes on aggregate investment. We develop a dynamic general equilibrium model with heterogeneous firms, which face discrete capital gains tax rates based on firm size. We calibrate our model by targeting micro moments and a difference-in-differences estimate of the capital stock response based on the institutional setting and policy reform in Korea. We find that the reform that reduced the capital gains tax rates for a subset of firms substantially increased investment in the short run, and capturing general equilibrium ...
Working Paper
Employment and Welfare Effects of the Quota for Disabled Workers in Brazil
I study the effect of a quota for disabled workers on the labor market and on welfare. Using a task-based model, I show that the effect of a quota will depend on the productivity of disabled workers and their labor supply elasticity. I estimate the productivity of disabled workers using variation from inspections of the quota. I find that the quota increased the hiring of disabled workers, but it reduced wages and employment of non-disabled workers, suggesting that the quota reduced firms’ productivity. I estimate the labor supply elasticity of disabled workers using heterogeneous exposure ...
Working Paper
Liquidity Premiums on Government Debt and the Fiscal Theory of the Price Level
We construct a dynamic general equilibrium model where agents use nominal government bonds as collateral in secured lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real rate on bonds. In equilibrium, the price level is determined according to the fiscal theory of the price level. However, the market value of government debt exceeds its fundamental value. We then examine the dynamic properties of the model and show that the market value of the government debt can fluctuate even though there are no changes to current or ...
Working Paper
Seigniorage and Sovereign Default: The Response of Emerging Markets to COVID-19
Monetary policy affects the tradeoffs faced by governments in sovereign default models. In the absence of lump-sum taxation, governments rely on both distortionary taxes and seigniorage to finance expenditure. Furthermore, monetary policy adds a time-consistency problem in debt choice, which may mitigate or exacerbate the incentives to accumulate debt. A deterioration of the terms-of-trade leads to an increase in sovereign-default risk and inflation, and a reduction in growth, which are consistent with the empirical evidence for emerging economies. An unanticipated shock resembling the ...
Briefing
Is Fiscal Austerity Good for the Economy?
Concerns about fiscal imbalances in Europe and the United States have led to intense debates about whether governments should dramatically cut spending or increase taxes to reduce government debt ? a course of action often called fiscal "austerity." But is austerity likely to hurt economic growth? That question has not been definitively answered ? but even if austerity is costly in the short run, it may provide long-run benefits.
Working Paper
Domestic Policies and Sovereign Default
This paper incorporates fiscal and monetary policies into a model of sovereign default. In addition to the standard present-bias vs default-risk tradeoff faced by governments when choosing debt, distortionary policy instruments introduce an intertemporal tradeoff, which may mitigate or exacerbate the incentives to accumulate debt. Taxation, the money growth rate and currency depreciation all increase with the level of debt. The model reproduces standard business cycle statistics, the response of spreads, inflation and growth to terms-of-trade shocks, and the cyclical properties of fiscal and ...
Speech
Views on the Economy and Monetary Policy: Government Affairs Breakfast Series, Dayton Area Chamber of Commerce, Dayton, OH
Today, I will provide my assessment of economic developments, and my outlook for the economy and monetary policy. The task before Fed policymakers is to calibrate monetary policy to this healthy economy so that our congressionally mandated long-run goals of maximum employment and price stability are met. This means making sure we don?t get behind the curve given the economy?s strength but also making sure we don?t overreact to the positive outlook. To my mind, that means if economic conditions evolve as expected, we?ll need to make some further increases in interest rates this year and next ...
Working Paper
On the optimal design of transfers and income-tax progressivity
We study the optimal design of means-tested transfers and progressive income taxes. In a simple analytical model, we demonstrate an optimally negative relation between transfers and income-tax progressivity due to efficiency and redistribution concerns. In a rich dynamic model, we quantify the optimal plan with flexible tax-and-transfer functions. Transfers should be larger than currently in the U.S. and financed with moderate income-tax progressivity. Transfers are key to implement higher progressivity in average than in marginal tax-and-transfer rates, achieving redistribution while ...
Working Paper
Trade policies and fiscal devaluations
Fiscal devaluations—an increase in import tariffs and export subsidies (IX) or an increase in value-added taxes and payroll subsidies (VP)—have been shown to provide as much stimulus under fixed exchange rates as a currency devaluation. We find that if agents expect policies to be reversed and the tax pass-through is large, VP is contractionary and IX provides a modest boost. In our medium-scale DSGE model, both features are crucial in accounting for Germany’s underperformance in response to VP in 2007. These findings cast doubt on fiscal devaluations as a cyclical stabilization tool ...
Working Paper
Flight to Liquidity or Safety? Recent Evidence from the Municipal Bond Market
We examine the effects of the COVID-19 pandemic and subsequent monetary and fiscal policy actions on municipal bond market pricing. Using high-frequency trading data, we estimate key policy events at the peak of the crisis by focusing on a sample of bonds within a narrow window before and after each policy event. We find that policy interventions, in particular those with explicit credit backstops, were effective in alleviating municipal bond market stress. Next, we exploit daily variation in traded municipal bonds and virus exposure across U.S. counties. We find a shift in how bond investors ...