Research Database

We explore quantitatively the possibility of multiple equilibria in a model of sovereign debt crises. The source of multiplicity is the one identified by Calvo (1988). This type of multiplicity has been at the heart of the policy debate through the recent European sovereign debt crisis. Key for multiplicity in the model is a stochastic process for output featuring long periods of either high or low growth. We calibrate the output process in the model using data for the southern European countries that were exposed to the debt crisis. We find that expectations-driven sovereign debt crises are empirically plausible, but only in periods of stagnation. Multiplicity is state dependent: in periods of stagnation and for intermediate levels of debt, interest rates may be high for reasons unrelated to fundamentals.

We assess the welfare consequences of occupational licensing for workers and consumers. We estimate a model of labor market equilibrium in which licensing restricts labor supply but also affects labor demand via worker quality and selection. On the margin of occupations licensed differently between U.S. states, we find that licensing raises wages and hours but reduces employment. We estimate an average welfare loss of 12 percent of occupational surplus. Workers and consumers respectively bear 70 and 30 percent of the incidence. Higher willingness to pay offsets 80 percent of higher prices for consumers, and higher wages compensate workers for 60 percent of the cost of mandated investment in occupation-specific human capital.

What structure of income taxation maximizes the social benefits of redistribution while minimizing the social harm associated with distorting the allocation of labor input? Many authors have advocated scrapping the current tax system, which redistributes primarily via marginal tax rates that rise with income, and replacing it with a flat tax system, in which marginal tax rates are constant and redistribution is achieved via non-means-tested transfers. In this paper we compare alternative tax systems in an environment with distinct roles for public and private insurance. We evaluate alternative policies using a social welfare function designed to capture the taste for redistribution reflected in the current tax system. In our preferred specification, moving to the optimal flat tax policy reduces welfare, whereas moving to the optimal fully nonlinear Mirrlees policy generates only tiny welfare gains. These findings suggest that proposals for dramatic tax reform should be viewed with caution.

After the economic reforms that followed the National Revolution of the 1950s, Bolivia seemed positioned for sustained growth. Indeed, it achieved unprecedented growth from 1960 to 1977. Mistakes in economic policies, especially the rapid accumulation of debt due to persistent deficits and a fixed exchange rate policy during the 1970s, led to a debt crisis that began in 1977. From 1977 to 1986, Bolivia lost almost all the gains in GDP per capita that it had achieved since 1960. In 1986, Bolivia started to grow again, interrupted only by the financial crisis of 1998–2002, which was the result of a drop in the availability of external financing. Bolivia has grown since 2002, but government policies since 2006 are reminiscent of the policies of the 1970s that led to the debt crisis, in particular, the accumulation of external debt and the drop in international reserves due to a de facto fixed exchange rate since 2012.

We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. Overall, we find very strong evidence of a long-run relationship between the ratio of M1 to GDP and a short-term interest rate, in spite of a few failures. The standard log-log specification provides a very good characterization of the data, with the exception of periods featuring very low interest rate values. This is because such a specification implies that, as the short rate tends to zero, real money balances become arbitrarily large, which is rejected by the data. A simple extension imposing limits on the amount that households can borrow results in a truncated log-log specification, which is in line with what we observe in the data. We estimate the interest rate elasticity to be between 0.3 and 0.6, which encompasses the well-known squared-root specification of Baumol and Tobin.

In this paper, I revisit some recent work on the theory of the money supply, using a theoretical framework that closely follows Karl Brunner's work. I argue that had his research proposals been followed by the profession, some of the misunderstandings related to the instability of the money demand relationship could have been avoided.

In this chapter, we review the monetary and fiscal history of Argentina for the period 1960–2017, a time during which the country suffered several balance of payments crises, three periods of hyperinflation, two defaults on government debt, and three banking crises. All told, between 1969 and 1991, after several monetary reforms, thirteen zeros had been removed from its currency. We argue that all these events are the symptom of a recurrent problem: Argentina’s unsuccessful attempts to tame the fiscal deficit. An implication of our analysis is that the future economic evolution of Argentina depends greatly on its ability to develop institutions that guarantee that the government does not spend more than its genuine tax revenues over reasonable periods of time.

This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex-ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically.

Japan is facing the problem of how to finance retirement, health care, and long-term care expenditures as the population ages. This paper analyzes the impact of policy options intended to address this problem by employing a dynamic general equilibrium overlapping generations model, specifically parameterized to match both the macro- and microeconomic level data of Japan. We find that financing the costs of aging through gradual increases in the consumption tax rate delivers better macroeconomic performance and higher welfare for most individuals relative to other financing options, including raising social security contributions, debt financing, and a uniform increase in health care and long-term care copayments.

We develop an asset pricing model with flexible heterogeneity in asset demand across investors, designed to match institutional and household holdings. A portfolio choice model implies characteristics-based demand when returns have a factor structure and expected returns and factor loadings depend on the assets' own characteristics. We propose an instrumental variables estimator for the characteristics-based demand system to address the endogeneity of demand and asset prices. Using U.S. stock market data, we illustrate how the model could be used to understand the role of institutions in asset market movements, volatility, and predictability.

In this paper, we show that there is substantial comovement between prices of primary commodities such as oil, aluminum, maize, or copper and real exchange rates between developed economies such as Germany, Japan, and the United Kingdom against the US dollar. We therefore explicitly consider the production of commodities in a two-country model of trade with productivity shocks and shocks to the supplies of commodities. We calibrate the model so as to reproduce the volatility and persistence of primary commodity prices and show that it delivers equilibrium real exchange rates that are as volatile and persistent as in the data. The model rationalizes an empirical strategy to identify the fraction of the variance of real exchange rates that can be accounted for by the underlying shocks, even if those are not observable. We use this strategy to argue that shocks that move primary commodity prices account for a large fraction of the volatility of real exchange rates in the data. Our analysis implies that existing models used to analyze real exchange rates between large economies that mostly focus on trade between differentiated final goods could benefit, in terms of matching the behavior of real exchange rates, by also considering trade in primary commodities.

Most firms begin very small, and large firms are the result of typically decades of persistent growth. This growth can be understood as the result of some form of organization capital accumulation. In the US, the distribution of firm size k has a right tail only slightly thinner than 1/k. This is shown to imply that incumbent firms account for most aggregate organization capital accumulation. And it implies potentially extremely slow aggregate convergence rates. A benchmark model is proposed in which managers can use incumbent organization capital to create new organization capital. Workers are a specific factor for producing consumption, and they require managerial supervision. Through the lens of the model, the aftermath of the Great Recession of 2008 is unsurprising if the events of late 2008 and early 2009 are interpreted as a destruction of organization capital, or as a belief shock that made consumers want to reduce consumption and accumulate more wealth instead.

White, non-college-educated Americans born in the 1960s face shorter life expectancies, higher medical expenses, and lower wages per unit of human capital compared with those born in the 1940s, and men's wages declined more than women's. After documenting these changes, we use a life-cycle model of couples and singles to evaluate their effects. The drop in wages depressed the labor supply of men and increased that of women, especially in married couples. Their shorter life expectancy reduced their retirement savings but the increase in out-of-pocket medical expenses increased them by more. Welfare losses, measured as a one-time asset compensation, are 12.5%, 8%, and 7.2% of the present discounted value of earnings for single men, couples, and single women, respectively. Lower wages explain 47-58% of these losses, shorter life expectancies 25-34%, and higher medical expenses account for the rest.

To infer social preferences regarding the relative earnings of spouses, we use measurement error in the earnings reported for married couples in the Current Population Survey. We compare the earnings reported for husbands and wives in the survey with their “true” earnings as reported by their employers to tax authorities. Compared with couples where the wife earns just less than the husband, those where she earns just more are 15.9 percentage points more likely to under-report her relative earnings. This pattern reflects the reporting behavior of both husbands and wives and is consistent with a norm that husbands out-earn their wives.

Cities with cleaner power plants and lower energy demand have stricter land use restrictions; these restrictions increase housing prices and disincentivize living in these lower polluting cities. We use a spatial equilibrium model to quantify the effect of land use restrictions on household carbon emissions. Our model features heterogeneous households, cities that vary by power plant technology and the benefits of energy usage, as well as endogenous wages and rents. Relaxing restrictions in California to the national median leads to a 2.3% drop in national carbon emissions. The burden of a carbon tax differs substantially across locations.

We study optimal savings policies when there is a dual concern about undersaving for retirement and income inequality. Agents differ in present bias and earnings ability, both unobservable to a planner with paternalistic and redistributive motives. We characterize the solution to this two-dimensional screening problem and provide a decentralization using realistic policy instruments: mandatory savings at low incomes but a choice between subsidized savings vehicles at high incomes—resembling Social Security, 401(k), and IRA accounts in the US. Offering more savings choice at higher incomes facilitates redistribution. To solve large-scale versions of this problem numerically, we propose a general, computationally stable, and efficient active-set algorithm. Relative to the current US retirement system, we find significant welfare gains from increasing mandatory savings and limiting savings choice at low incomes.

We develop a job ladder model with labor reallocation across firms and regions, and estimate it on matched employer-employee data to study the large and persistent real wage gap between East and West Germany. We find that the wage gap is mostly due to firms paying higher wages per efficiency unit in West Germany and quantify a rich set of frictions preventing worker reallocation across space and across firms. We find that three spatial barriers impede East Germans’ ability to migrate West: migration costs, a preference to live in the East, and fewer job opportunities received from the West. The estimated model highlights that the spatial barriers needed to generate the large wage gap between East and West are small relative to the frictions preventing the reallocation of labor across firms. Therefore, policies that directly promote regional integration lead to smaller aggregate benefits than equally costly hiring subsidies within region.

Why do young firms pay less? Using confidential microdata from the US Census Bureau, we find lower earnings among workers at young firms. However, we argue that such measurement is likely subject to worker and firm selection. Exploiting the two-sided panel nature of the data to control for relevant dimensions of worker and firm heterogeneity, we uncover a positive and significant young-firm pay premium. Furthermore, we show that worker selection at firm birth is related to future firm dynamics, including survival and growth. We tie our empirical findings to a simple model of pay, employment, and dynamics of young firms.

Defaults have been shown to have a powerful effect on retirement saving behavior yet there is limited research on who is most affected by defaults and whether this varies based on features of the choice environment. Using administrative data on employer-sponsored retirement accounts linked to survey data, we estimate the relationship between retirement saving choices and individual characteristics – long-term discounting, present bias, financial literacy, and exponential-growth bias – under two distinct choice environments: an opt-in regime and an auto-enrollment regime. Consistent with our conceptual model, we find that the determinants of following the default and contribution behavior are regime-specific. Under the opt-in regime, financial literacy plays an important role in predicting total contributions, active saving choices, and maxing out contributions in the tax-preferred account. In contrast, under the auto-enrollment regime, present bias is the most significant behavioral predictor of contribution behavior. A causal interpretation of the estimates suggests that auto-enrollment increases saving primarily among those with low financial literacy.

This paper analyzes the optimal response of the social insurance system to a rise in labor market risk. To this end, we develop a tractable macroeconomic model with risk-free physical capital, risky human capital (labor market risk) and unobservable effort choice affecting the distribution of human capital shocks (moral hazard). We show that constrained optimal allocations are simple in the sense that they can be found by solving a static social planner problem. We further show that constrained optimal allocations are the equilibrium allocations of a market economy in which the government uses taxes and transfers that are linear in household wealth/income. We use the tractability result to show that an increase in labor market (human capital) risk increases social welfare if the government adjusts the tax-and-transfer system optimally. Finally, we provide a quantitative analysis of the secular rise in job displacement risk in the US and find that the welfare cost of not adjusting the social insurance system optimally can be substantial.

We investigate cyclicality of variance and skewness of household labor income risk using PSID data. There are five main findings. First, we find that head's labor income exhibits countercyclical variance and procyclical skewness. Second, the cyclicality of hourly wages is muted, suggesting that head's labor income risk is mainly coming from the volatility of hours. Third, younger households face stronger cyclicality of income volatility than older ones, although the level of volatility is lower for the younger ones. Fourth, while a second earner helps lower the level of skewness, it does not mitigate the volatility of household labor income risk. Meanwhile, government taxes and transfers are found to mitigate the level and cyclicality of labor income risk volatility. Finally, among heads with strong labor market attachment, the cyclicality of labor income volatility becomes weaker, while the cyclicality of skewness remains.

This paper examines the price of basic staples in rural Mexico. We document that nonlinear pricing in the form of quantity discounts is common, that quantity discounts are sizable for typical staples, and that the well-known conditional cash transfer program Progresa has significantly increased quantity discounts, although the program, as documented in previous studies, has not affected on average unit prices. To account for these patterns, we propose a model of price discrimination that nests those of Maskin and Riley (1984) and Jullien (2000), in which consumers differ in their tastes and, because of subsistence constraints, in their ability to pay for a good. We show that under mild conditions, a model in which consumers face heterogeneous subsistence or budget constraints is equivalent to one in which consumers have access to heterogeneous outside options. We rely on known results (Jullien (2000)) to characterize the equilibrium price schedule, which is nonlinear in quantity. We analyze the effect of nonlinear pricing on market participation as well as the impact of a market-wide transfer, analogous to the Progresa one, when consumers are differentially constrained. We show that the model is structurally identified from data on prices and quantities from a single market under common assumptions. We estimate the model using data from municipalities and localities in Mexico on three commonly consumed commodities. Interestingly, we find that nonlinear pricing is beneficial to a large number of households, including those consuming small quantities, relative to linear pricing mostly because of the higher degree of market participation that nonlinear pricing induces. We also show that the Progresa transfer has affected the slopes of the price schedules of the three commodities we study, which have become steeper as consistent with our model, leading to an increase in the intensity of price discrimination. Finally, we show that a reduced form of our model, in which the size of quantity discounts depends on the hazard rate of the distribution of quantities purchased in a village, accounts for the shift in price schedules induced by the program.

This study identifies the impact of access to and the speed of divorce on the welfare of children in a middle income largely Catholic country. Using difference-in-difference estimation techniques, I compare school enrollment for children of married and cohabiting parent households before and after the legalization of divorce. Implementing pro-homemaker divorce laws increased school enrollment anywhere from 3.4 to 5.5 percentage points, and the effect was particularly salient on secondary school students. I provide evidence that administrative processes influencing the speed of divorce affect household bargaining and investments in schooling. With every additional six months wait to the finalization of divorce, school enrollment decreased by approximately one percentage point. The impact almost doubles for secondary schooling. When contemplating development policies, advocates, policymakers, and leaders should not overlook the impact changes in family policies and administrative processes can have on advancements in child welfare and, ultimately, economic development.

I develop an idea flows theory of firm and worker dynamics in order to assess the consequences of population aging. Older people are less likely to attempt entrepreneurship and switch employers because they have found better jobs. Consequently, aging reduces entry and worker mobility through a composition effect. In equilibrium, the lower entry rate implies fewer new, better job opportunities for workers, while the better matched labor market dissuades job creation and entry. Aging accounts for a large share of substantial declines in firm and worker dynamics since the 1980s, primarily due to equilibrium forces. Cross-state evidence supports these predictions.

Following the sovereign debt crisis of 2012, some southern European countries have debated proposals to leave the Euro. We evaluate this policy change in a standard monetary model with seigniorage financing of the deficit. The main novel feature is that we depart from rational expectations while maintaining full rationality of agents in a sense made very precise. Our first contribution is to show that small departures from rational expectations imply that inflation upon exit can be orders of magnitude higher than under rational expectations. Our second contribution is to provide a framework for policy analysis in models without rational expectations.

Sovereign governments owe debt to many foreign creditors and can choose which creditors to favor when making payments. This paper documents the de facto seniority structure of sovereign debt using new data on defaults (missed payments or arrears) and creditor losses in debt restructuring (haircuts). We overturn conventional wisdom by showing that official bilateral (government-to-government) debt is junior, or at least not senior, to private sovereign debt such as bank loans and bonds. Private creditors are typically paid first and lose less than bilateral official creditors. We confirm that multilateral institutions like the IMF and World Bank are senior creditors.

This paper proposes a theory of foreign reserves as macroprudential policy. We study an open economy model of financial crises, in which pecuniary externalities lead to over-borrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section, and can quantitatively account for the recent upward trend in international reserves.

During the past two decades, households experienced increases in their average wages and expenditures alongside with divergent trends in their wages, expenditures, and time allocation. We develop a model with incomplete asset markets and household heterogeneity in market and home technologies and preferences to account for these labor market trends and assess their welfare consequences. Using micro data on expenditures and time use, we identify the sources of heterogeneity across households, document how these sources have changed over time, and perform counterfactual analyses. Given the observed increase in leisure expenditures relative to leisure time and the complementarity of these inputs in leisure technology, we infer a significant increase in the average productivity of time spent on leisure. The increasing productivity of leisure time generates significant welfare gains for the average household and moderates negative welfare effects from the rising dispersion of expenditures and time allocation across households.

Women are well represented in some academic fields but notably underrepresented in others, including many STEM fields. Motivated by studies that show collaboration is more attractive to women than men, we investigate whether female participation across academic fields is related to how collaborative those fields are. Using panel data for 30 academic fields from 1975 to 2014, we find that one additional author on the average paper published in a field is associated with an increase of 2.5 percentage points in the female share of PhD recipients. This estimate implies that about 30 percent of the observed rise in female share during our sample period can be attributed to increased collaboration.