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Working Paper
Beliefs, Aggregate Risk, and the U.S. Housing Boom
Endogenously optimistic beliefs about future house prices can account for the path and standard deviation of house prices in the U.S. housing boom of the 2000s. In a general equilibrium model with incomplete markets and aggregate risk, agents form beliefs about future house prices in response to shocks to fundamentals. In an income expansion with looser credit conditions, agents are more likely to underpredict house prices and revise up their beliefs. Matching the standard deviation and steady rise in house prices results in homeownership becoming less affordable later in the boom as well as ...
Working Paper
Monetary Policy with Racial Inequality
I develop a heterogeneous-agent New-Keynesian model featuring racial inequality in income and wealth, and studies interactions between racial inequality and monetary policy. Black and Hispanic workers gain more from accommodative monetary policy than White workers mainly due to higher labor market risks. Their gains are larger also because of a larger proportion of them are hand-to-mouth, while wealthy White workers gain more from asset price appreciation. Monetary and fiscal policies are substitutes in providing insurance against cyclical labor market risks. Racial minorities gain even more ...
Working Paper
Generational War on Inflation: Optimal Inflation Rates for the Young and the Old
How does a grayer society affect the political decision-making regarding inflation rates? Is deflation preferred as a society ages? In order to answer these questions, we compute the optimal inflation rates for the young and the old respectively, and explore how they change with demographic factors, by using a New Keynesian model with overlapping generations. According to our simulation results, there indeed exists a tension between the young and the old on the optimal inflation rates, with the optimal inflation rates differing between generations. The rates can be significantly different ...
Working Paper
Health-care reform or labor market reform? A quantitative analysis of the affordable care act
An equilibrium model with firm and worker heterogeneity is constructed to analyze labor market and welfare implications of the Patient Protection and Affordable Care Act, commonly called the Affordable Care Act (ACA). The authors? model implies a significant reduction in the uninsured rate from 22.6 percent to 5.6 percent. The model predicts a moderate positive welfare gain from the ACA because of the redistribution of income through health insurance subsidies at the exchange as well as the Medicaid expansion. About 2.1 million more part-time jobs are created under the ACA at the expense of ...
Working Paper
Optimal Public Debt with Life Cycle Motives
Public debt can be optimal in standard incomplete market models with infinitely lived agents, since the associated capital crowd-out induces a higher interest rate. The higher interest rate encourages individuals to save and, hence, better self-insure against idiosyncratic labor earnings risk. Even though individual savings behavior is a crucial determinant of the optimality of public debt, this class of economies abstracts from empirically observed life cycle savings patterns. Thus, this paper studies how incorporating a life cycle affects optimal public debt. We find that while the ...
Working Paper
Credit, bankruptcy, and aggregate fluctuations
We ask two questions related to how access to credit affects the nature of business cycles. First, does the standard theory of unsecured credit account for the high volatility and procyclicality of credit and the high volatility and countercyclicality of bankruptcy filings found in U.S. data? Yes, it does, but only if we explicitly model recessions as displaying countercyclical earnings risk (i.e., rather than having all households fare slightly worse than normal during recessions, we ensure that more households than normal fare very poorly). Second, does access to credit smooth aggregate ...
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Micro Risks and Pareto Improving Policies with Low Interest Rates
We provide sufficient conditions for the feasibility of a Pareto-improving fiscal policy when the risk-free interest rate on government bonds is below the growth rate. We do so in the class of incomplete markets models pioneered by Bewley-Huggett-Aiyagari, but we allow for an arbitrary amount of ex ante heterogeneity in terms of preferences and income risk. We consider both the case of dynamic inefficiency as well as the more plausible case of dynamic efficiency. The key condition is that seigniorage revenue raised by government bonds exceeds the increase in the interest rate times the ...