Welcome - Bienvenidos - Välkommen
I am a Professor at CEMFI, an Associate Professor at the Institute for International Economic Studies at Stockholm University (on leave), a Research Fellow of the Centre for Economic Policy Research, and a Research Fellow of the IZA Institute of Labor Economics. My research focuses broadly on macroeconomics. I am particularly interested in monetary and fiscal policy, housing, household debt and default, and labor market dynamics. I am currently a Managing Editor of the Review of Economic Studies.
NEW: At long last, a (preliminary) draft of our paper on bankruptcy and automatic stabilizers. Comments welcome! Consumer Bankruptcy as Aggregate Demand Management joint with Adrien Auclert.
REVISED: A draft of our paper on inequality and capital flows Why Does Capital Flow from Equal to Unequal Countries? joint with Sergio de Ferra and Federica Romei.
NEW: A draft of our policy piece on the macroeconomic implications of debt relief policy The Macroeconomics of Household Debt Relief joint with Adrien Auclert.
REVISED: Paper on the cut in UI in Missouri Micro and Macro Effects of UI Policies: Evidence from Missouri
Calls for Papers
I'm privileged to be involved in the organization of the following great conferences:
SITE Session on Macroeconomics and Inequality. This is the fourth edition of our site session, organized jointly with Adrien Auclert, Corina Boar, and Chris Tonetti. It will take place August 15-17, 2022 at Stanford. Deadline: May 31, 2022
Economic Growth and Fluctuations Group, Barcelona Summer Forum. This is the fifth edition of our Summer Forum session, organized jointly with David Lagakos, Raul Santaeulalia-Llopis, and Ludo Visschers. It will take place June 9-10, 2022 in Barcelona. Deadline: February 28, 2022
VMACS - Virtual Macro Seminar
I'm a co-organizer of the VMACS seminar series. Check out our website to see the great line up of macro speakers. Follow VMACS on Twitter @virtualmacrosem and see past seminars on our YouTube Channel.
Northwestern, Mannheim, EIEF, Bocconi Finance, Konstanz Seminar on Monetary Theory, LMU, Liverpool, Santiago Macro Conference, Panmure House
On the Possibility of Krusell-Smith Equilibria
Journal of Economic Dynamics and Control Volume 141, August 2022, 104391
Solutions to macroeconomic models with wealth inequality and aggregate shocks often rely on the assumption of limited but common information among households. We show that this assumption is inconsistent with rational information choice for plausible information costs. To do so, we embed information choice into the workhorse heterogeneous-agent model with aggregate risk (Krusell and Smith, 1998). First, we demonstrate that the benefits of acquiring more precise information about the state of the economy depend crucially on household wealth. Second, we show that such heterogeneous incentives to acquire information combine with the strategic substitutability of savings choices to imply that equilibria in which households acquire the same information do not exist for plausible information costs. Finally, we document that a representative-agent equilibrium may not exist even in the absence of exogenous sources of wealth heterogeneity.
Whether, When and How to Extend Unemployment Benefits: Theory and Application to COVID-19
Journal of Public Economics Volume 200, August 2021, 104447
with Stan Rabinovich
We investigate the optimal response of unemployment insurance to economic shocks, both with and without commitment. The optimal policy with commitment follows a modified Baily-Chetty formula that accounts for job search responses to future UI benefit changes. As a result, the optimal policy with commitment tends to front-load UI, unlike the optimal discretionary policy. In response to shocks intended to mimic those that induced the COVID-19 recession, we find that a large and transitory increase in UI is optimal; and that a policy rule contingent on the change in unemployment, rather than its level, is a good approximation to the optimal policy.
The Housing Boom and Bust: Model Meets Evidence
Journal of Political Economy, 2020, 128:9, 3285:3345 (Lead article)
We build a model of the U.S. economy with multiple aggregate shocks (income, housing finance conditions, and beliefs about future housing demand) that generate fluctuations in equilibrium house prices. Through a series of counterfactual experiments, we study the housing boom and bust around the Great Recession and obtain three main results. First, we find that the main driver of movements in house prices and rents was a shift in beliefs. Shifts in credit conditions do not move house prices but are important for the dynamics of home ownership, leverage, and foreclosures. The role of housing rental markets and long-term mortgages in alleviating credit constraints is central to these findings. Second, our model suggests that the boom-bust in house prices explains half of the corresponding swings in non-durable expenditures and that the transmission mechanism is a wealth effect through household balance sheets. Third, we find that a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.
Non-durable Consumption and Housing Net Worth in the Great Recession: Evidence from Easily Accessible Data
Journal of Public Economics. Volume 189, September 2020, 104176
In an influential paper, Mian, Rao and Sufi (2013) exploit geographic variation to measure the effect of the fall in housing net worth on household expenditures during the Great Recession. Their widely-cited estimates are based on proprietary house price and proprietary expenditure data and therefore not easily replicable. We use alternative data on a subset of non-durable goods and on house prices, which are more easily accessible, to replicate their study. When estimating their same specification on our data, we obtain values for the elasticity of expenditures to the housing net worth shock that are virtually indistinguishable from theirs. However, our robustness analyses with respect to alternative model specifications yield more nuanced conclusions about the separate roles of house prices and initial housing exposure/leverage for the drop in expenditures. Moreover, the estimated elasticity is consistent, theoretically and quantitatively, with a simple calibrated model with wealth effects where leverage and credit constraints play no role.
Household Heterogeneity and the Transmission of Foreign Shocks
Journal of International Economics, 2020, Vol 124
We study the role of heterogeneity in the transmission of foreign shocks. We build a Heterogeneous-Agent New-Keynesian Small Open Model Economy (HANKSOME) that experiences a current account reversal. Households' portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows. The contraction is more severe when households are leveraged and owe debt in foreign currency. In this setting, the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households. Closing the output gap via an exchange-rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation. Our HANKSOME framework can rationalize the observed "fear of floating" in emerging market economies, even in the absence of contractionary devaluations.
Journal of Monetary Economics 2019, Volume 102:1-23 (Lead article)
We assess the power of forward guidance-promises about future interest rates-as a monetary tool in a liquidity trap using a quantitative incomplete-markets model. Our results suggest the effects of forward guidance are negligible. A commitment to keep future nominal interest rates low for a few quarters---although macro indicators suggest otherwise---has only trivial effects on current output and employment. We explain theoretically why in complete markets models forward guidance is powerful---generating a ``forward guidance puzzle"---and why this puzzle disappears in our model. We also clarify theoretically ambiguous conclusions from previous research about the effectiveness of forward guidance in incomplete and complete markets models.
Exploiting MIT Shocks in Heterogeneous-Agent Economies: The Impulse Response as a Numerical Derivative
Journal of Economic Dynamics and Control  2018, Vol 89, Pages 68-92
We propose a new method for computing equilibria in heterogeneous-agent models with aggregate uncertainty. The idea relies on an assumption that linearization offers a good approximation; we share this assumption with existing linearization methods. However, unlike those methods, the approach here does not rely on direct derivation of first-order Taylor terms. It also does not use recursive methods, whereby aggregates and prices would be expressed as linear functions of the state, usually a very high-dimensional object (such as the wealth distribution). Rather, we rely merely on solving nonlinearly for a deterministic transition path: we study the equilibrium response to a single, small "MIT shock" carefully. We then regard this impulse response path as a numerical derivative in sequence space and hence provide our linearized solution directly using this path. The method can easily be extended to the case of many shocks and computation time rises linearly in the number of shocks. We also propose a set of checks on whether linearization is a good approximation. We assert that our method is the simplest and most transparent linearization technique among currently known methods. The key numerical tool required to implement it is value-function iteration, using a very limited set of state variables.
Macroeconomic Effects of Bankruptcy and Foreclosure Policies
American Economic Review 2016, Vol. 106(8): 2219-2255
I study the implications of two major debt-relief policies in the US: the Bankruptcy Abuse and Consumer Protection Act (BAPCPA) and the Home Affordable Refinance Program (HARP). To do so, I develop a model of housing and default that includes relevant dimensions of credit-market policy and captures rich heterogeneity in household balance sheets. The model also explains the observed cross-state variation in consumer default rates. I find that BAPCPA significantly reduced bankruptcy rates, but increased foreclosure rates when house prices fell. HARP reduced foreclosures by one percentage point and provided substantial welfare gains to households with high loan-to-value mortgages.
Macroeconomics and Heterogeneity, Including Inequality
In Handbook of Macroeconomics. Vol. 2. Elsevier, 2016. 843-921.
The goal of this chapter is study how, and by how much household income, wealth and preference heterogeneity amplifies and propagates a macroeconomic shock. We focus on the U.S. Great Recession of 2007-2009 and proceed in two steps. First, using data from the Panel Study of Income Dynamics, we document the patterns of household income, consumption and wealth inequality before and during the Great Recession. We then investigate how households in different segments of the wealth distribution were affected by income declines, and how they changed their expenditures differentially during the aggregate downturn. Motivated by this evidence we study several variants of a standard heterogeneous household model with aggregate shocks and an endogenous cross-sectional wealth distribution. Our key model finding is that wealth inequality can significantly amplify the impact of an aggregate shock, but it does so if (and only if) the distribution features a sufficiently large fraction of households with very little net worth, as is empirically observed in the PSID. We also investigate the role social insurance policies, such as unemployment insurance, play for shaping the cross-sectional income and wealth distribution, and through it, the dynamics of business cycles.
On the Distribution of the Welfare Losses of Large Recessions
Forthcoming, Advances in Economics and Econometrics: Theory and Applications, Eleventh World Congress 2016
How big are the welfare losses from severe economic downturns, such as the Great Recession the U.S. experienced in recent years? How are those losses distributed across the population? In this paper we answer these questions using a canonical business-cycle model featuring household income and wealth heterogeneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find the welfare cost of losing one's job in a Great Recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low wealth households. The cost increases to approximately 8% for low wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption). We finally show that a more generous unemployment insurance system unequivocally helps low-wealth job losers, but that it hurts households who keep their job, even in a version of the model in which output is partly demand determined and therefore unemployment insurance stabilizes aggregate demand and output.
Optimal Unemployment Insurance in an Equilibrium Business-Cycle Model
Journal of Monetary Economics 2015. Vol. 71, 99-118, with Stan Rabinovich
The optimal cyclical behavior of unemployment insurance is characterized in an equilibrium search model with risk-averse workers. Contrary to the current US policy, the path of optimal unemployment benefits is pro-cyclical - positively correlated with productivity and employment. Furthermore, optimal unemployment benefits react non-monotonically to a productivity shock: in response to a fall in productivity, they rise on impact but then fall significantly below their pre-recession level during the recovery. As compared to the current US unemployment insurance policy, the optimal state-contingent unemployment benefits smooth cyclical fluctuations in unemployment and deliver substantial welfare gains.
Housing, Mortgage Bailout Guarantees and the Macro Economy
Journal of Monetary Economics 2013. Vol. 60(8), with K. Jeske & Dirk Krueger
What are the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (e.g., Fannie Mae)? A model with heterogeneous, infinitely lived households and competitive housing and mortgage markets is constructed to evaluate this question. Households can default on their mortgages via foreclosure. The bailout guarantee is a tax-financed mortgage interest rate subsidy. Eliminating this subsidy leads to a large decline in mortgage origination and increases aggregate welfare by 0.5% in consumption equivalent variation, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: it hurts low-income and low-asset households.
Consumer Bankruptcy as Aggregate Demand Management
with Adrien Auclert
We study the role of consumer bankruptcy policy in macroeconomic stabilization. Our economy features nominal rigidities, incomplete financial markets, and heterogeneous households with access to unsecured defaultable debt. We derive sufficient statistics for quantifying the contribution of automatic stabilizers to dampening output fluctuations. Bankruptcy is an automatic stabilizer if the average consumption effect of default, or "ACED" (the causal effect of default on consumption) is larger than the marginal propensity to consume of savers. Quantitatively, for the United States, we show that the current bankruptcy code reduces the amplitude of output fluctuations by 6%, and that bankruptcy rules that systematically respond to the business cycle could increase this number to 13%. By comparison, countercyclical government spending and deficits reduce output fluctuations by 19% and 11%, respectively.
Why Does Capital Flow from Equal to Unequal Countries
We document that capital has flowed from equal to unequal countries since the 1990s. Differences in private savings between equal and unequal countries drive the flows. This empirical regularity holds across advanced economies. We develop a simple framework to analytically characterize how international financial integration can lead to capital flows from countries with low income inequality to those with high inequality when trading assets is subject to endogenous constraints arising from limited enforcement of contracts. Finally, we show a calibrated two-country heterogeneous-agent general-equilibrium model with limited enforcement frictions that can quantitatively account for the observed capital flows. Incorporating the friction, as opposed to assuming exogenously incomplete markets, is crucial for the success of the model in explaining the data.
Expectation and Wealth Heterogeneity in the Macroeconomy
New: December 2022
We document systematic differences in macroeconomic expectations across U.S. households and rationalize our findings with a theory of information choice. We embed this theory into an incomplete-markets model with aggregate risk. Our model is quantitatively consistent with the pattern of expectation heterogeneity in the data. Relative to a full-information counterpart, our model implies substantially increased macroeconomic volatility and inequality. We show through the example of a wealth tax that neglecting the information channel leads to erroneous conclusions about the effects of macroeconomic policies. While in the model without information choice a wealth tax reduces wealth inequality, in our framework it reduces information acquired in the economy, leading to increased volatility and higher top-end wealth inequality in equilibrium.
Economic Activity and COVID-19 Transmission: Evidence from an Estimated Economic-Epidemiological Model
New: May 2020
We develop and estimate a spatial model of the joint evolution of economic variables and the spread of COVID-19 across U.S. counties. Agents in the model optimally trade-off engaging in market consumption with the risk of contracting the disease. To motivate the model, we use three novel county-level data sets to document key empirical relationships between non-pharmaceutical interventions (NPIs), health, mobility, and employment outcomes at a daily frequency. We investigate the relative importance of NPIs, such as stay-at-home orders, and endogenous social distancing. Finally, we use our estimated model to address key issues in battling the pandemic: How will the spread of the disease and economic activity evolve if current NPIs are relaxed? What are optimal implementable NPI policies, taking into account the trade-off between the spread of the virus and economic activity?
Micro and Macro Effects of UI Policies: Evidence from Missouri
CEPR Discussion Paper 14158, IZA Discussion Paper 12805 Update: April 2022
with Fatih Karahan & and Brendan Moore
We develop a method to jointly measure the response of worker search effort (micro effect) and vacancy creation (macro effect) to changes in the duration of unemployment insurance (UI) benefits. To implement this approach, we exploit an unexpected cut in UI durations in Missouri and provide quasi-experimental evidence on the effect of UI on the labor market. The data indicate that the cut in Missouri significantly increased job finding rates by both raising the search effort of unemployed workers and the availability of jobs. The latter accounts for at least one half of the total effect.
The Mortensen-Pissarides Paradigm: New Evidence
NEW: May 2019
The Mortensen-Pissarides paradigm offers a new theory of the labor market. Firms' decisions to invest in the job-creation process respond to intertemporal incentives but frictions prevent workers from finding these jobs instantaneously. While the theoretical differences between this new paradigm and the traditional approach based on frictionless labor markets has been studied extensively in the macroeconomics literature, there is surprisingly scant direct empirical evidence on the relevance of this change in the macroeconomic paradigm. We provide such evidence by measuring the aggregate implications of a specific macroeconomic event. Interpreting the findings through the lens of the textbook Mortensen-Pissarides model implies that the job-creation channel at the heart of the framework is quantitatively important.
The Fiscal Multiplier
NBER Working Paper #25571 Update: December 2019
We measure the size of the fiscal multiplier using a heterogeneous-agent model with incomplete markets, capital and rigid prices and wages. The environment encompasses the essential elements necessary for a quantitative analysis of fiscal policy. First, output is partially demand-determined due to pricing frictions in product and labor markets, so that a fiscal stimulus increases aggregate demand. Second, incomplete markets deliver a realistic distribution of dynamic consumption and investment responses to stimulus policies across the population. These elements give rise to the standard textbook Keynesian-cross logic which, and unlike conventional wisdom would suggest, is significantly reinforced in our dynamic forward looking model. We find that market incompleteness is key to determining the size of the fiscal multiplier, which is uniquely determined in our model for any combination of fiscal and monetary policies of interest. The multiplier is 1.34 if deficit-financed and 0.61 if contemporaneously tax-financed for a pegged nominal interest rate, with similar values in a liquidity trap. If monetary policy follows a Taylor rule, the numbers drop to 0.66 and 0.54, respectively. We elucidate the importance of market incompleteness for our results and contrast them to models featuring complete markets or hand-to-mouth consumers.
Do Unemployment Benefits Explain the Emergence of Jobless Recoveries?
IZA Discussion Paper #12365 Update: February 2020
with Stan Rabinovich
Countercyclical unemployment benefit extensions in the United States act as a propagation mechanism, contributing to both the high persistence of unemployment and its weak correlation with productivity. We show this by modifying an otherwise standard frictional model of the labor market to incorporate a stochastic and state-dependent process for unemployment insurance estimated on US data. Accounting for movements in both productivity and unemployment insurance, our calibrated model is consistent with unemployment dynamics of the past 50 years. In particular, it explains the emergence of jobless recoveries in the 1990's as well as their absence in previous recessions, the low correlation between unemployment and labor productivity, and the apparent shifts in the Beveridge curve following recessions. Next, we embed this mechanism into a medium-scale DSGE model, which we estimate using standard Bayesian methods. Both shocks to unemployment benefits and their systematic component are shown to be important for the sluggish recovery of employment following recessions, in particular the Great Recession, despite the fact that shocks to unemployment benefits account for little of the overall variance decomposition. We also find that unemployment benefit extensions prevented deflation in the last three recessions, thus acting similarly to a wage markup shock. We conclude that unemployment benefit extensions are a promising source of an endogenous labor wedge.
Unemployment Benefits and Unemployment in the Great Recession: The Role of Equilibrium Effects
NBER Working Paper #19499 Updated: January 2019
Equilibrium labor market theory suggests that unemployment benefit extensions affect unemployment by impacting both job search decisions by the unemployed and job creation decisions by employers. The existing empirical literature focused on the former effect only. We develop a new methodology necessary to incorporate the measurement of the latter effect. Implementing this methodology in the data, we find that benefit extensions raise equilibrium wages and lead to a sharp contraction in vacancy creation, employment, and a rise in unemployment.
Media coverage: The Wall Street Journal, Business Insider, Bloomberg, Washington Examiner, Business Insider (x2), Detroit Free Press, The Washington Post, macroblog, Marginal Revolution, Greg Mankiw, National Review, National Review (x2)
Radio Appearances: NPR Where We Live, January 21, 2014, Sirius Business Radio
The Impact of Unemployment Benefit Extensions on Employment: The 2014 Employment Miracle?
NBER Working Paper #20884 Updated: January 2016
We measure the aggregate effect of unemployment benefit duration on employment and the labor force. We exploit the variation induced by Congress' failure in December 2013 to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. Our baseline estimates reveal that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.019 log points. In levels, 2.1 million individuals secured employment in 2014 due to the benefit cut. More than 1.1 million of these workers would not have participated in the labor market had benefit extensions been reauthorized.
Media coverage: National Review,The Wall Street Journal, The Economist, The Wall Street Journal (x2),National Review (x2),The Washington Post, The Washington Post (x2), The Washington Post (x3), Washington Examiner, Bloomberg View, Investors Business Daily, FiveThirtyEight, National Review (x3), Deseret News National,Marginal Revolution, John Cochrane, Greg Mankiw, EconLog, AEI Ideas
TV Appearance: The Steve Malzberg Show on Newsmax TV
Interpreting Recent Quasi-Experimental Evidence on the Effects of Unemployment Benefit Extensions
NBER WP 22280, CEPR DP 11290 Updated: May 2016
We critically review recent methodological and empirical contributions aiming to provide a comprehensive assessment of the effects of unemployment benefit extensions on the labor market and attempt to reconcile their apparently disparate findings. We describe two key challenges facing these studies - the endogeneity of benefit durations to labor market conditions and isolating true effects of actual policies from agents' responses to expectations of future policy changes. Marinescu (2015) employs a methodology that does not attempt to address these challenges. A more innovative approach in Coglianese (2015) and Chodorow-Reich and Karabarbounis (2016) attempts to overcome these challenges by exploiting a sampling error in unemployment rates as an exogenous variation. Unfortunately, we find that this approach falls prey to the very problems it aims to overcome and it appears unlikely that the fundamental bias at the core of this approach can be overcome. We find more promising the approach based on unexpected policy changes as in the recent contributions by Johnston and Mas (2015) and Hagedorn, Manovskii and Mitman (2015). This approach by design addresses the problem of benefit endogeneity. It does not, however, fully address the effects of expectations and generally yields a lower bound on the actual effects of policies.
Our ongoing discussion with Chodorow-Reich and Karabarbounis:
Our response to CRK writings and the Replication package of data, programs and log files for all results in the paper Updated: August 2016
Work in Progress
Monetary Policy, Heterogeneity and the Housing Channel
Measuring the Effect of Health Insurance on Consumer Bankruptcies from the ACA Medicaid Expansion
with Mark Bognanni & Daniel Kolliner
On the Redistributive Effects of Government Bailouts in the Mortgage Market
with Dirk Krueger and Richard Foltyn
Unemployment Benefits and Unemployment in the Great Recession: The Role of Micro Effects
Liquidity Effects of Unemployment Benefit Extensions: Evidence from Consumer Credit Data
with Fatih Karahan & Ben Pugsley
Monetary Policy in Incomplete Markets Models: Theory and Evidence
HIV and Risky Sexual Behavior: Evaluating the Equilibrium Impact of ART and PrEP
with Kory Kantenga
Short Timescale Variability in the External Shock Model of Gamma Ray Bursts
The Astrophysical Journal Letters 513, L5-L8, (1999), with C.D. Dermer
Beaming, Baryon-Loading, and the Synchrotron Self-Compton Component in Gamma-Ray Burst Blast Waves Energized by External Shocks
The Astrophysical Journal 537, 785-795, (2000), with C.D. Dermer and J. Chiang
Competitive Advantage for Multiple-Memory Strategies in an Artificial Market
Proceedings of the SPIE Volume 5848, p. 225-232 (2005), with S.C. Choe and N.F. Johnson
Defining time in a minimal hippocampal CA3 model by matching time-span of associative synaptic modification and input pattern duration
Proceedings of the International Joint Conference on Neural Networks Volume 3, 1631-1636 (2003), with P.A. Laurent and W.B. Levy
External Shock Model for the Prompt Phase of Gamma Ray Bursts: Implications for GRB Source Models
Proc. of the Third Rome Workshop on Gamma-Ray Bursts in the Afterglow Era ASP Conference Series, Volume 312 (2003), with C.D. Dermer