MEF-Seminar Summersemester 2022

Please find the Zoom-access data in order to join the seminar here: Meeting ID: 676 0075 2505 Passcode: 98465

We provide evidence on narratives about the macroeconomy—stories individuals tell to make sense of economic phenomena—in the context of a historically notable rise in inflation. In surveys with experts and US households, we measure narratives in open-ended text responses and quantitatively represent them as Directed Acyclical Graphs (DAGs). We document three main findings. First, narratives about the drivers of higher inflation rates are heterogeneous and differ fundamentally between experts and households. Compared to experts’ narratives, households’ narratives are more fragmented, focus less on the demand side, and are more likely to feature ideologically loaded explanations, such as government mismanagement or price gouging. Second, households’ narratives are predictive of their inflation expectations, and an additional experiment reveals that drawing households’ attention to government spending causally affects their narratives and inflation expectations.

We construct a dynamic general equilibrium model with occupation mobility, human capital accumulation and endogenous assignment of workers to tasks to quantitatively assess the aggregate impact of automation and other task-biased technological innovations. We extend recent quantitative general equilibrium Roy models to a setting with dynamic occupational choices and human capital accumulation. We provide a set of conditions for the problem of workers to be written in recursive form and provide a sharp characterization for the optimal mobility of individual workers and for the aggregate supply of skills across occupations. We craft our dynamic Roy model in a production setting where multiple tasks within occupations are assigned to workers or machines. We solve for the balanced-growth path and characterize the aggregate transitional dynamics ensuing task-biased technological innovations.

Corporate fiscal policy over the business cycle is carried out in very different ways over time and across countries. Moreover, little is known about how it should be conducted. This paper studies the design of optimal fiscal policy in a heteroge- neous firm environment, when the economy is hit by aggregate shocks. It provides tools to understand when and how heterogeneous firms should be taxed or subsi- dized over cycles. To tackle this issue, I first solve a tractable model which delivers a simple distribution of firms. In this framework, I provide an analytical characterization of the corporate tax rate over the business cycle. Then, using a fully fledged heterogeneous firm model and cutting-edge computational method, I solve for the optimal path of the tax rate in this environment. My main result is that, in both exercises, the variation of the optimal tax rate depends on the expected persistence of the aggregate shock.

Unfortunately, this seminar has to be cancelled. We apologize for the short notice, but hope to welcome many participants next week again on site.

It is widely believed that governments tend to over accumulate debt, which gives rise to the need for fiscal rules. This paper studies the optimal fiscal and default rules when governments can default on their debt obligations. We build a continuous-time model that encompasses the standard rationale for debt overaccumulation: hyperbolic discounting and political economy frictions. In addition, governments are subject to taste shocks, which makes spending optimally random. Since shocks are private information, there is a trade-off between rules and discretion. We derive the optimal fiscal rules which are debt-dependent only when default is possible. Depending on the severity of the spending bias and the cost of default, the optimal fiscal rules range from strict debt limits, complemented by strong deficit limits, to the absence of all rules.

We study the relationship between corporate taxation and carbon emissions in the U.S. We find that dirty firms pay lower profit taxes – the opposite of what optimal taxation of negative externalities prescribes. This relationship is driven by dirty firms benefiting disproportionately more from the tax shield of debt due to their higher leverage. In turn, we show that the higher leverage of dirty firms is explained by their higher asset tangibility. We embed our estimates into a general equilibrium framework and show that eliminating the tax-advantage of debt reduces carbon emissions by about 3.9%, while aggregate output falls by roughly 2.2%.

Using a structural life-cycle model and data on school visits from Safegraph and school closures from Burbio, we quantify the heterogeneous impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. Our data suggests that secondary schools were closed for in-person learning for longer periods than elementary schools, and that private schools experienced shorter closures than public schools, and schools in poorer U.S. counties experienced shorter school closures. We then extend the structural life cycle model of private and public schooling investments studied in Fuchs-Schündeln, Krueger, Ludwig, and Popova (2021) to include the choice of parents whether to send their children to private schools and then feed into the model the school closure measures from our empirical analysis to quantify the long-run consequences of the Covid-19 school closures.

Please note: Due to this year´s summer school, two seminars will be held in this week. Abstract: "The sharp, secular decline in the world real interest rate of the past thirty years suggests that the observed surge in global demand for financial assets outpaced the growth in supply. We argue that this phenomenon was driven by (i) faster growth in emerging market economies, and (ii) changes in the financial structure of both emerging and advanced economies. We then show that the low-interest-rate environment made the world economy more vulnerable to financial crises. These findings are derived quantitatively using a two-region model in which financial assets provide direct services to production and private debt can be defaulted on."

"What is the role of credit scores in credit markets? We argue that it is a stand-in for a market assessment of a person’s unobservable type (which here we take to be patience). We pose a model of persistent hidden types where observable actions shape the public assessment of a person’s type via Bayesian updating. We show how dynamic reputation can incentivize repayment. Importantly, we show how an economy with credit scores implements the same equilibrium allocation. We estimate the model using both credit market data and the evolution of individuals’ credit scores. We find a 13% difference in patience in almost equally sized groups in the steady state population with significant turnover and a shift towards becoming more patient with age. If tracking of individual credit actions is outlawed, poor young adults of low type benefit from subsidization by high types despite facing higher interest rates arising from lower dynamic incentives to repay."

We look at environements where workers differ on wealth and wages and where they choose which wage/job to look for. They sometimes quit, lose their jobs or switch to other jobs. We use this structure to investigate the degree of job rigidity by matching the cyclical volatility of job to job transitions.

(cancelled) "Half of the jobs in the U.S. feature pay-for-performance. We derive novel incidence and optimum formulas for the overall rate of tax progressivity and the top tax rates on total earnings and bonuses, when such labor contracts arise from moral hazard frictions within firms. Optimal taxes account for the fiscal externalities and welfare consequences of two distinct forces: a direct crowding-out of private insurance and a countervailing crowding-in due to endogenous labor effort responses. These imply that the amount of pre-tax earnings risk to which the worker is exposed is roughly invariant to tax progressivity, whereas the (adverse) welfare consequences of the crowd-out outweigh those of the crowd-in. Quantitatively, the optimal tax policy with performance-pay contracts is close to that prescribed by standard models that treat pre-tax earnings risk as exogenous. Finally, we uncover an efficiency-based argument for taxing bonuses at strictly lower rates than base earnings."