Research Database

We present a tractable dynamic macroeconomic model of self-fulfilling bank runs. A bank is vulnerable to a run when a loss of investors’ confidence triggers deposit withdrawals and leads the bank to default on its obligations. We analytically characterize how the vulnerability of an individual bank depends on macroeconomic aggregates and how the number of banks facing a run affects macroeconomic aggregates in turn. In general equilibrium, runs can be partial or complete, depending on aggregate leverage and the dynamics of asset prices. Our normative analysis shows that the effectiveness of credit easing and its welfare implications depend on whether a financial crisis is driven by fundamentals or by self-fulfilling runs.

We derive an optimal labor income tax rate formula for urban models in which tax rates are determined by traditional forces plus a new term arising from urban forces: house price, migration and agglomeration effects. Based on the earnings distributions and housing costs in large and small US cities, we find that in a benchmark model (i) optimal income tax rates are U-shaped, (ii) urban forces serve to raise optimal tax rates at all income levels and (iii) adopting an optimal tax system induces agents with low skills to leave large, productive cities. While agglomeration effects enter the optimal tax formula, they play almost no quantitative role in shaping optimal labor income tax rates.

To to get the COVID-19 virus under control, many countries have shut down parts of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have most to lose. We build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young, retired), by sector (basic, luxury), and by health status. Disease transmission occurs in the workplace, through consumption, at home, and in hospitals. We study the optimal economic mitigation policy for a government that can redistribute through taxes and transfers, but where taxation distorts labor supply and output. Optimal redistribution and mitigation policies interact, and more modest shutdowns are optimal when redistribution creates tax distortions. A harder but shorter shutdown is preferred as vaccines become available in the first half of 2021.

What is the optimal fiscal policy response to a recession when the government is subject to sovereign risk? We study this question in a model of endogenous sovereign default with nominal rigidities. Increasing spending in a recession reduces unemployment, but exposes the government to a debt crisis. We quantitatively analyze this trade-off between stimulus and austerity and find that expanding government spending may be undesirable even in the presence of sizeable Keynesian stabilization gains and inequality concerns. Consistent with these findings, we show that sovereign risk is a key driver of the observed fiscal procyclicality in the data.

US social transfer programs vary substantially across states, incentivizing households to locate in states with more generous transfer programs. Further, transfer formulas often decrease in income, therefore rewarding low-income households for living in low-paying cities. We quantify these distortions by combining a spatial equilibrium model with a detailed model of transfer programs in the US. The current system leads to locational inefficiency of 4.38% of total transfer spending. A reform that both harmonizes transfer policies across states and indexes household income to local average earnings reduces this inefficiency by over 85 percent while still preserving the programs' means-tested nature.

Past research has provided evidence of clientelistic politics in delivery of program benefits by local governments (gram panchayats (GPs)), and manipulation of GP program budgets by legislators and elected officials at upper tiers in West Bengal, India. Using household panel survey data spanning 1998-2008, we examine the consequences of clientelism for distributive equity. We find that targeting of anti-poverty programs was progressive both within and across GPs, and is explained by greater 'vote responsiveness' of poor households to receipt of welfare benefits. Across-GP allocations were more progressive than a rule-based formula recommended by the 3rd State Finance Commission (SFC) based on GP demographic characteristics. Moreover, alternative formulae for across-GP budgets obtained by varying weights on GP characteristics used in the SFC formula would have improved pro-poor targeting only marginally. Hence, there is not much scope for improving pro-poor targeting of private benefits by transitioning to formula-based budgeting.

Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that the entry and exit of plants account for a larger fraction of aggregate productivity growth during periods of fast GDP growth. To analyze this relationship, we develop a model of firm entry and exit based on Hopenhayn (1992). When we introduce reforms that reduce entry costs or reduce barriers to technology adoption into a calibrated model, we find that the entry and exit terms in the FHK decomposition become more important as GDP grows rapidly, just as they do in the data from Chile and Korea.

We develop a model of banking industry dynamics to study the quantitative impact of regulatory policies on bank risk taking and market structure. Since our model is matched to U.S. data, we propose a market structure where big banks with market power interact with small, competitive fringe banks as well as non-bank lenders. Banks face idiosyncratic funding shocks in addition to aggregate shocks which affect the fraction of performing loans in their portfolio. A nontrivial bank size distribution arises out of endogenous entry and exit, as well as banks' buffer stock of capital. We show the model predictions are consistent with untargeted business cycle properties, the bank lending channel, and empirical studies of the role of concentration on financial stability. We find that regulatory policies can have an important impact on banking market structure, which, along with selection effects, can generate changes in allocative efficiency and stability.

We present a simple open economy framework to study the transmission channels of monetary and macroprudential policies and evaluate the implications for international spillovers and global welfare. Using an analytical decomposition, we first identify three transmission channels: intertemporal substitution, expenditure switching, and aggregate income. Quantitatively, expenditure switching plays a prominent role for monetary policy, while macroprudential policy operates almost entirely through intertemporal substitution. Turning to the normative analysis, we show that the risk of a liquidity trap generates a monetary policy tradeoff between stabilizing output today and reducing capital flows to lower the likelihood of a future recession. However, leaning against the wind is not necessarily optimal, even in the absence of capital controls. Finally, we argue that contrary to emerging policy concerns, capital controls are not beggar-thy-neighbor and can enhance global macroeconomic stability.

We review methods used to numerically compute optimal Mirrleesian tax and transfer schedules in heterogeneous agent economies. We show that the coarseness of the productivity grid, while a technical detail in terms of theory, is critical for delivering quantitative policy prescriptions. Existing methods are reliable only when a very fine grid is used. The problem is acute for computational approaches that use a version of the Diamond-Saez implicit optimal tax formula. If using a very fine grid for productivity is impractical, then optimizing within a flexible parametric class is preferable to the non-parametric Mirrleesian approach.

This paper studies lockdown policy in a dynamic economy without government commitment. Lockdown imposes a cap on labor supply, which improves health prospects at the cost of economic output and consumption. A government would like to commit to the extent of future lockdowns in order to guarantee an economic outlook that supports efficient levels of investment into intermediate inputs. However, such a commitment is not credible, since investments are sunk at the time when the government chooses a lockdown. As a result, lockdown under lack of commitment deviates from the optimal policy. Rules that limit a government’s lockdown discretion can improve social welfare, even in the presence of noncontractible information. Quantitatively, lack of commitment causes lockdown to be significantly more severe than is socially optimal. The output and consumption loss due to lack of commitment is greater for higher intermediate input shares, higher discount rates, higher values of life, higher disease transmission rates at and outside of work, and longer vaccine arrival times.

We revisit the estimation of the welfare costs of inflation originating from lack of liquidity satiation. We use data for the United States and several other developed countries. Our computations are heavily influenced by the recent experience of very low, even negative, short-term rates observed in the countries we study. We obtain estimates that range between 0.20% and 1.5% of lifetime consumption for the United States and find even higher values for some European countries.

We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for dollar liquid assets. Financial flows are unpredictable and may leave banks “scrambling for dollars.” Because of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield on the dollar. We show that an increase in the dollar funding risk leads to a rise in the convenience yield and an appreciation of the dollar, as banks scramble for dollars. We present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity, which is consistent with the theory.

Iovino, La’O and Mascarenhas (forthcoming) ask two important questions regarding the optimal conduct of monetary policy: Should the central bank’s policy depend on information the central bank has that is not available to markets? And should the central bank disclose information that it has but market participants do not? Iovino, La’O and Mascarenhas answer these questions using a simple, stylized model with one-period price stickiness. They show that efficient equilibria can be sustained regardless of whether policy depends on the central bank’s information and regardless of its disclosure policy. We explain the logic behind their irrelevance result and show that if restrictions are imposed on equilibria, then monetary policy should in general depend on the central bank’s information. Finally, we offer some speculative answers to their questions and discuss the sense in which policy is converging towards theory.

We provide a simple framework to study the prudential use of capital controls and currency reserves that have been explored in the recent literature. We cover the role of both pecuniary externalities and aggregate demand externalities. The model features a central policy dilemma for emerging economies facing large capital outflows: the choice between increasing the policy rate to stabilize the exchange rate and decreasing the policy rate to stabilize employment. Ex ante capital controls and reserve accumulation can help mitigate this dilemma. We use our framework to survey the recent literature and provide an overview of recent empirical findings on the use of these policies.

It is well known that monetary and fiscal policy are connected by a common budget constraint. In this paper, we study how this manifests itself in the context of the Eurozone, where that connection links the European Central Bank, the 19 national central banks, the Treasuries of 19 countries, and the European Union. Our goal is twofold. First, we wish to clarify how seigniorage flows from the monetary authority to the budget of each country. Second, we seek to answer the question of how the taxpayers of each country are affected by a default of one of the participants to the union. In answering this question, we analyze the mechanisms that ensure (or do not ensure) that net liabilities across countries stay bounded, and we establish how the answer depends on the liquidity premium that each category of assets commands (cash, excess reserves within the Eurosystem, and government bonds). We find that the official risk-sharing provisions of the policy of quantitative easing (QE), whereby national central banks retain 90% of the risk intrinsic in bonds of their own country, only holds under restrictive assumptions; under plausible scenarios, a significantly larger fraction of the risk is mutualized.

We develop a restart algorithm based on Scarf’s (1973) algorithm for computing approximate Brouwer fixed points. We use the algorithm to compute all of the equilibria of a general equilibrium pure-exchange model with four consumers, four goods, and 15 equilibria. The mathematical result that motivates the algorithm is a fixed-point index theorem that provides a sufficient condition for uniqueness of equilibrium and a necessary condition for multiplicity of equilibria. Examining the structure of the model with 15 equilibria provides us with a method for constructing higher dimensional models with even more equilibria. For example, using our method, we can construct a pure-exchange economy with eight consumers and eight goods that has (at least) 255 equilibria.

In this paper, we ask how to best allocate a given time-varying supply of vaccines across individuals of different ages during the second phase of the Covid-19 pandemic . Building on our previous heterogeneous household model of optimal economic mitigation and redistribution (Glover et al., 2021), we contrast the actual vaccine deployment path, which prioritized older, retired individuals, with one that first vaccinates younger workers. Vaccinating the old first saves more lives but slows the economic recovery, relative to inoculating the young first. Vaccines deliver large welfare benefits in both scenarios (relative to a world without vaccines), but the old-first policy is optimal under a utilitarian social welfare function. The welfare gains from having vaccinated the old first are especially significant once the economy is hit by a more infectious Delta variant in the summer of 2021.

We investigate the credibility of central bank research by searching for traces of researcher bias, which is a tendency to use undisclosed analytical procedures that raise measured levels of statistical significance (stars) in artificial ways. To conduct our search, we compile a new dataset and borrow 2 bias-detection methods from the literature: the p-curve and z-curve. The results are mixed. The p-curve shows no traces of researcher bias but has a high propensity to produce false negatives. The z-curve shows some traces of researcher bias but requires strong assumptions. We examine those assumptions and challenge their merit. At this point, all that is clear is that central banks produce results with patterns different from those in top economic journals, there being less bunching around the 5 per cent threshold of statistical significance.

We develop a theory of sweat equity—the value of business owners' time and expenses to build customer bases, client lists, and other intangible assets. We discipline the theory using data from U.S. national accounts, business censuses, and brokered sales to estimate a value for sweat equity in the private business sector equal to 1.2 times U.S. GDP, which is about the same magnitude as the value of fixed assets in use in these businesses. For a typical owner, 26 percent of the sweat equity is transferable through inheritance or sale. The equity values are positively correlated with business incomes and standard measures of markups based on accounting data, but not with owners' financial assets or standard measures of business total factor productivity. We use our theory to show that abstracting from sweat activity leads to a significant understatement of the impacts of lowering business income tax rates on private business activity for both the extensive and intensive margins. Despite finding larger responses, our model's implied tax elasticities of establishments and owner hours are in line with empirical estimates in the public finance literature. Allowing for financial constraints and superstar firms does not overturn our main findings.

The prevailing neo-Wicksellian view holds that the central bank's objective is to track the natural rate of interest (r *), which itself is largely exogenous to monetary policy. We challenge this view using a fixed-cost model of durable consumption demand, in which expansionary monetary policy prompts households to accelerate purchases of durable goods. This yields an intertemporal trade-off in aggregate demand as encouraging households to increase durable holdings today leaves fewer households acquiring durables going forward. Interest rates must be kept low to support demand going forward, so accommodative monetary policy today reduces r * in the future. We show that this mechanism is quantitatively important in explaining the persistently low level of real interest rates and r * after the Great Recession.

Using a novel meta-analytical method, Brodeur et al. (2016) argue that hypothesis tests in top economic journals have exaggerated levels of statistical significance. Brodeur et al. (2020) apply the same method to another sample of hypothesis tests, obtaining similar results. We investigate the reliability of the method by highlighting questionable assumptions and compiling a dataset to examine their merits. Our findings support the original conclusions.

In this paper, we review the relationship between inflation rates, nominal interest rates, and rates of growth of monetary aggregates for a large group of OECD countries. If persistent changes in the monetary policy regime are accounted for, the behavior of these series maintains the close relationship predicted by standard quantity theory models. With an estimated model, we show those relationships to be relatively invariant to alternative frictions that can deliver quite different high-frequency dynamics. We also show that the low-frequency component of the data derived from statistical filters does reasonably well in capturing these regime changes. We conclude that the quantity theory relationships are alive and well, and thus they are useful for policy design aimed at controlling inflation.

I present a behavioral epidemiological model of the evolution of the COVID epidemic in the United States and the United Kingdom over the past 12 months. The model includes the introduction of a new, more contagious variant in the UK in early fall and the US in mid December. The model is behavioral in that activity, and thus transmission, responds endogenously to the daily death rate. I show that with only seasonal variation in the transmission rate and pandemic fatigue modeled as a one-time reduction in the semi-elasticity of the transmission rate to the daily death rate late in the year, the model can reproduce the evolution of daily and cumulative COVID deaths in the both countries from Feb 15, 2020 to the present remarkably well. I find that most of the end-of-year surge in deaths in both the US and the UK was generated by pandemic fatigue and not the new variant of the virus. I then generate forecasts for the evolution of the epidemic over the next two years with continuing seasonality, pandemic fatigue, and spread of the new variant.

Education services in the United States are determined predominantly by non-market institutions, the rules of which are defined by state constitutions. This paper empirically examines the effect of changes in constitutional provisions on education outcomes in the United States. To show causal effects, we exploit discontinuities in the procedure for adopting constitutional amendments to compare outcomes when an amendment passed with those when an amendment failed. Our results show that adoption of an amendment results in higher per-pupil expenditure, higher teacher salaries, smaller class size, and improvements in reading and math test scores. We examine the underlying mechanism driving these results by studying the actions of the legislature and the courts after an amendment is passed. We find that, on average, the legislature responds with a one-year lag in enacting education policies satisfying the minimum standards imposed by the amendment, and there is no increase in the number of education cases reaching appellate courts. Using school finance reforms, we also show that in situations where the legislature fails to enact education policies, courts intervene to enforce constitutional standards to improve outcomes. This enforcement mechanism is more impactful in states that have higher constitutional minimum standards. Taken together, the causal effects on education outcomes and the patterns in legislative bill enactments and court cases provide a novel test of the hypothesis that a strong constitutional provision improves the bargaining position of citizens vis-à-vis that of elected leaders. If citizens do not receive education services as mandated in the constitution, they can seek remedy in court.

We show that a simple model of COVID-19 that incorporates feedback from disease prevalence to disease transmission through an endogenous response of human behavior does a remarkable job fitting the main features of the data on the growth rates of daily deaths observed across a large number countries and states of the United States from March to November of 2020. This finding, however, suggests a new empirical puzzle. Using an accounting procedure akin to that used for Business Cycle Accounting as in Chari et al. (2007), we show that when the parameters of the behavioral response of transmission to disease prevalence are estimated from the early phase of the epidemic, very large wedges that shift disease transmission rates holding disease prevalence fixed are required both across regions and within a region over time for the model to match the data on deaths from COVID-19 as an equilibrium outcome exactly. We show that these wedges correspond to large shifts in model forecasts for the long-run attack rate of COVID-19 both across locations and over time. Future research should focus on understanding the sources in these wedges in the relationship between disease prevalence and disease transmission.

This online appendix accompanies Staff Report 620: Star Wars at Central Banks.

Supplemental data and code for replication.

This appendix contains the pre-registered analysis for our comment on “Star Wars: The Empirics Strike Back” by Brodeur et al (2016). To structure the analysis, we reproduce the pre-registration; our results appear in red under each of the relevant parts. The time-stamped version of the pre-registration is available from the Open Science Framework website at the address https://doi.org/10.17605/OSF.IO/58MNJ.

To understand this appendix deeply, we recommend carefully reading Brodeur et al (2016). The body of our comment paper outlines only the intuition of their method. In some of the figures presented in this appendix, we use labels that differ from those in Brodeur et al. (2016), and we do so to more clearly connect to the intuition we offer.

We show that cities with higher population density specialize in high-skill service jobs that can be done remotely. The urban and industry bias of remote work potential shaped the recent pandemic’s economic impact. Many high-skill service workers started to work remotely, withdrawing spending from big-city consumer service industries dependent on their demand. As a result, low-skill service workers in big cities bore most of the recent pandemic’s economic impact. Our findings have broader implications for the distributional consequences of the U.S. economy’s transition to more remote work.

This paper studies the short- and long-run effects of large firms on economic development. We use evidence from one of the largest multinationals of the 20th century: the United Fruit Company (UFCo). The firm was given a large land concession in Costa Rica—one of the so-called "Banana Republics"—from 1899 to 1984. Using administrative census data with census-block geo-references from 1973 to 2011, we implement a geographic regression discontinuity design that exploits a quasi-random assignment of land. We find that the firm had a positive and persistent effect on living standards. Company documents explain that a key concern at the time was to attract and maintain a sizable workforce, which induced the firm to invest heavily in local amenities that can account for our result. Consistent with this mechanism, we show, empirically and through a proposed model, that the firm's welfare effect is increasing in worker mobility.

To measure labor market power in the US economy, we develop a tractable quantitative, general equilibrium, oligopsony model of the labor market. We estimate key model parameters by matching the firm-level relationship between labor market share and employment size and wage responses to state corporate tax changes. The model quantitatively replicates quasi-experimental evidence on (i) imperfect productivity-wage pass-through, (ii) strategic behavior of dominant employers, and (iii) the local labor market impact of mergers. We then measure welfare losses relative to the efficient allocation. Accounting for transition dynamics, we quantify welfare losses from labor market power relative to the efficient allocation as roughly 6 percent of lifetime consumption. An analytical decomposition attributes equal parts to dead-weight losses and misallocation. Lastly, we find that declining local concentration added 4 ppt to labor's share of income between 1977 and 2013.

This paper aims at an improved understanding of the relationship between monetary policy and racial inequality. We investigate the distributional effects of monetary policy in a unified framework, linking monetary policy shocks both to earnings and wealth differentials between black and white households. Specifically, we show that, although a more accommodative monetary policy increases employment of black households more than white households, the overall effects are small. At the same time, an accommodative monetary policy shock exacerbates the wealth difference between black and white households, because black households own less financial assets that appreciate in value. Over multi-year time horizons, the employment effects are substantially smaller than the countervailing portfolio effects. We conclude that there is little reason to think that accommodative monetary policy plays a significant role in reducing racial inequities in the way often discussed. On the contrary, it may well accentuate inequalities for extended periods.

We examine the determinants of COVID-19 risk exposure in the context of the initial wave in New York City. During the beginning of the first wave of the pandemic, out-of-home activity related to commuting was strongly associated with COVID-19 cases at the ZIP code level and hospitalization at an individual level. After layoffs of workers decreased commuting, case growth continued through household crowding. A larger share of individuals in crowded housing, or commuting to essential and frontline work, are Black, Hispanic, and lower-income—which contributes to disparities in disease risk. As a result, our paper shows that structural socio-economic inequalities help determine the cross-section of COVID-19 risk exposure in urban areas.

Does job loss cause less economic damage if your parents are higher-income, and what are the implications for intergenerational mobility? In this paper we show that following a layoff, adult children born to parents in the bottom 20% of the income distribution have almost double the unemployment compared with those born to parents in the top 20%, with 118% higher present discounted value losses in earnings. Next, we show that these disparate impacts of job loss have important implications for inequality and intergenerational mobility. They increase the 80:20 income inequality ratio for those impacted by 8% and increase the rank-rank coefficient by 34%, implying large reductions in intergenerational mobility. In a simulation based on our main results, we show that the age 40 rank-rank correlation is 3.9% higher due to the disparate impact and incidence of job loss over the preceding decade. In the last part of the paper, we explore mechanisms and show that "baked in" advantages play an important role in explaining these differences.

We build a New Keynesian business-cycle model with rich household heterogeneity. In the model, systematic monetary stabilization policy affects the distribution of income, income risks, and the demand for funds and supply of assets: the demand, because matching frictions render idiosyncratic labor-market risk endogenous; the supply, because markups, adjustment costs, and the tax system mean that the average profitability of firms is endogenous. Disagreement about systematic monetary stabilization policy is pronounced. The wealth-rich or retired tend to favor inflation targeting. The wealth-poor working class, instead, favors unemployment-centric policy. One- and two-agent alternatives can show unanimous disapproval of inflation-centric policy, instead. We highlight how the political support for inflation-centric policy depends on wage setting, the tax system, and the portfolio that households have.

While the savings of retired singles tend to fall with age, those of retired couples tend to rise. We estimate a rich model of retired singles and couples with bequest motives and uncertain longevity and medical expenses. Our estimates imply that while medical expenses are an important driver of the savings of middle-income singles, bequest motives matter for couples and high-income singles, and generate transfers to non-spousal heirs whenever a household member dies. The interaction of medical expenses and bequest motives is a crucial determinant of savings for all retirees. Hence, to understand savings, it is important to model household structure, medical expenses, and bequest motives.

For whom has earnings risk changed, and why? To answer these questions, we develop a filtering method that estimates parameters of an income process and recovers persistent and temporary earnings for every individual at every point in time. Our estimation flexibly allows for first and second moments of shocks to depend upon observables as well as spells of zero earnings (i.e., unemployment) and easily integrates into theoretical models. We apply our filter to a unique linkage of 23.5m SSA-CPS records. We first demonstrate that our earnings-based filter successfully captures observable shocks in the SSA-CPS data, such as job switching and layoffs. We then show that despite a decline in overall earnings risk since the 1980s, persistent earnings risk has risen for both employed and unemployed workers, while temporary earnings risk declined. Furthermore, the size of persistent earnings losses associated with full year unemployment has increased by 50%. Using geography, education, and occupation information in the SSA-CPS records, we refute hypotheses related to declining employment prospects among routine and low-skill workers as well as spatial theories related to the decline of the Rust-Belt. We show that rising persistent earnings risk is concentrated among high-skill workers and related to technology adoption. Lastly, we find that rising persistent earnings risk while employed (unemployed) leads to welfare losses equivalent to 1.8% (0.7%) of lifetime consumption, and larger persistent earnings losses while unemployed lead to a 3.3% welfare loss.

We study the impact of increased pandemic-related childcare responsibilities on custodial mothers by telework compatibility of their job. We estimate changes in employment outcomes of these mothers in a difference-in-difference framework relative to prime-age women without children and a triple-difference framework relative to prime-age custodial fathers. Mothers' labor force participation decreased between 0.1 to 1.5 percentage points (ppts) relative to women without dependent children and 0.3 to 2.0 ppts compared to custodial fathers. Conditional on being in the labor force, the probability of being unemployed fell by 0.7 ppts relative to childless women. Conditional on being employed, leave take-up increased by 0.7 ppts. These patterns were especially prominent among custodial mothers with a college degree or higher in telework-compatible jobs. Compared to women without children, mothers working as teachers and white-collar workers disproportionately left the labor market at the end of the 2020-2021 virtual school year. These mothers likely struggled balancing remote work while simultaneously supporting their children's virtual schooling needs. The disparity between mothers and fathers widened over time, indicating the prevalence of inequality in sharing household duties even today. By the start of the 2021-2022 school year, eighteen months after the pandemic began, mothers' employment was still adversely impacted by childcare disruptions. Our findings emphasize that while flexible work has been shown to increase women's labor supply, it is not sufficient to ensure continued and increasing levels of women's labor force participation if accessible and affordable childcare is unavailable while they work for pay.

We revisit the causes, welfare consequences, and policy implications of the dispersion in households' labor market outcomes using a model with uninsurable risk, incomplete asset markets, and home production. Allowing households to be heterogeneous in both their disutility of home work and their home production efficiency, we find that home production amplifies welfare-based differences meaning that inequality in standards of living is larger than we thought. We infer significant home production efficiency differences across households because hours working at home do not covary with consumption and wages in the cross section of households. Heterogeneity in home production efficiency is essential for inequality, as home production would not amplify inequality if differences at home only reflected heterogeneity in disutility of work.

The slope of the Phillips curve in New Keynesian models is difficult to estimate using aggregate data. We show that in a Bayesian estimation, the priors placed on the parameters governing nominal rigidities significantly influence posterior estimates and thus inferences about the importance of nominal rigidities. Conversely, we show that priors play a negligible role in a New Keynesian model estimated using state-level data. An estimation with state-level data exploits a relatively large panel dataset and removes the influence of endogenous monetary policy.

In social science research, household income is widely used as a stand-in for, or approximation to, the economic well-being of households. In a parallel way, income-inequality has been employed as a stand-in for inequality of economic well-being, or for brevity, "economic-inequality." But there is a force in market economies, ones with extensive amounts of monopoly, like the United States, which leads income-inequality to understate economic-inequality. This force has not been recognized before and derives from how monopolies behave. Monopolies, of course, raise prices. This reduces the purchasing power of households, or the value of their income. But monopolies, in fact, reduce the purchasing power of low-income households much more than high-income households. What has not been recognized is that, in many markets, as monopolies raise the prices for their goods, they simultaneously destroy substitutes for their products, low-cost substitutes that are purchased by low-income households. In these markets, then, while high-income households face higher prices, low-income households are shut out of markets, markets for goods and services that are extremely important for their economic well-being. It often leaves them with extremely poor alternatives, and sometimes none, for these products. Some of the markets we discuss include those for housing, financial services, and K-12 public education services. We also discuss markets for legal services, health care services, used durable equipment and repair services. Monopolies that infiltrate public institutions to enrich members, including those in foster care services, voting institutions and antitrust institutions, are also discussed.

Under certain assumptions, monopolistic competition with CES preferences is efficient, as first discovered by Dixit and Stiglitz. One assumption, invariably left implicit, is that there are, at any given point in time, no bounds on the number of products that can be discovered. But square wheels do not work, and round wheels keep getting rediscovered. Giving away patents to entrepreneurs who happen to be the first to discover a product generates an inefficiently large amount of variety. The stock of undiscovered products is a commons that can attract too many discovery attempts. Perpetual patents can be efficient, but only when combined with just the right tax on patent-protected monopoly profits. Such a tax is, however, too crude an instrument in an economy with even the least amount of heterogeneity.

This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary independence, lenders anticipate that the government would face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. In a quantitative application to the Eurozone debt crisis, we find that the lack of monetary autonomy played a central role in making Spain vulnerable to a rollover crisis. Finally, we argue that a lender of last resort can go a long way towards reducing the costs of giving up monetary independence.