diff --git a/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_intro.ipynb b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_intro.ipynb new file mode 100644 index 00000000..518e30ec --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_intro.ipynb @@ -0,0 +1,21 @@ +{ + "cells": [ + { + "cell_type": "markdown", + "id": "7067c25d", + "metadata": {}, + "source": [ + "Dupor, Bill and Karabarbounis, Marios and Kudlyak, Marianna and Saif Mehkari, M, Regional Consumption Responses and the Aggregate Fiscal Multiplier\n", + "\n", + "Original ballpark: Nathan Robino — February 2026" + ] + } + ], + "metadata": { + "language_info": { + "name": "python" + } + }, + "nbformat": 4, + "nbformat_minor": 5 +} diff --git a/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_prior-literature.ipynb b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_prior-literature.ipynb new file mode 100644 index 00000000..be653a33 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_prior-literature.ipynb @@ -0,0 +1,54 @@ +{ + "cells": [ + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "# Prior literature summary\n", + "\n", + "{cite:t}`Dupor2023-bn` builds directly on two empirical traditions in fiscal macroeconomics. First, a large ARRA-based regional literature developed causal estimates of local spending effects using plausibly exogenous allocation rules and IV strategies (for example, {cite:t}`Wilson2012-bc`; {cite:t}`Chodorow-Reich2012-bo`; {cite:t}`Conley2013-ca`; {cite:t}`Leduc2017-yn`; {cite:t}`Dupor2018-zh`; {cite:t}`Auerbach2019-pi`; and {cite:t}`Chodorow-Reich2019-zl`). These papers established that cross-region fiscal shocks can raise local employment, wages, and activity, while also emphasizing spillovers and aggregation issues. In parallel, identification work ({cite:t}`Ramey2009-jx,Ramey2016-tn,Ramey2019-go`; {cite:t}`Nakamura2011-dw`; see also {cite:t}`Nakamura2018-wz`) clarified how to interpret local multipliers versus national multipliers and why cross-sectional estimates are informative but not automatically sufficient for aggregate policy conclusions.\n", + "\n", + "The paper also relies on a major theoretical shift from representative-agent models toward heterogeneous-agent, incomplete-markets New Keynesian frameworks. Classic incomplete-markets foundations ({cite:t}`Huggett1993-ft,Aiyagari1994-qp`) and later HANK advances ({cite:t}`Kaplan2014-ee`; {cite:t}`Kaplan2018-sr`; {cite:t}`Auclert2018-ii`; {cite:t}`Auclert2019-dr`; {cite:t}`Hagedorn2019-op`) showed that incomplete risk sharing, liquidity constraints, and MPC heterogeneity are central for fiscal transmission, especially near the zero lower bound (also in {cite:t}`Christiano2011-ro`; {cite:t}`Woodford2011-jp`; {cite:t}`Eggertsson2009-yu`; {cite:t}`Farhi2012-oe`). Empirical household-spending evidence from rebates and balance-sheet shocks ({cite:t}`Sahm2010-sz,Sahm2011-ta`; {cite:t}`Parker2013-py`; {cite:t}`Mian2013-wr`; {cite:t}`Jappelli2014-og`) made these mechanisms quantitatively credible. Together, this literature made Dupor et al.'s strategy possible: estimate local consumption responses in rich micro data, then map them to aggregate multipliers in a multi-region HANK model with trade linkages and incomplete risk sharing.\n", + "" + ], + "id": "eadff64f" + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## 5 foundational papers \n", + "\n", + "1. **Aiyagari (1994), _Uninsured Idiosyncratic Risk and Aggregate Saving_** *(Incomplete-markets foundation)* \n", + " Canonical heterogeneous-agent benchmark showing how uninsurable risk and borrowing constraints shape aggregate outcomes; foundational for later HANK fiscal analysis.\n", + "\n", + "2. **Christiano, Eichenbaum, and Rebelo (2011), _When Is the Government Spending Multiplier Large?_** *(New Keynesian fiscal theory / ZLB)* \n", + " Landmark theoretical result that multipliers can be substantially larger near the zero lower bound, central to post-crisis fiscal-policy modeling.\n", + "\n", + "3. **Nakamura and Steinsson (Fiscal Stimulus in a Monetary Union, NBER/AER line of work)** *(Regional empirical identification)* \n", + " Pioneering use of cross-region variation in a monetary union to identify local spending multipliers; a core template for ARRA-based empirical designs.\n", + "\n", + "4. **Kaplan, Moll, and Violante (2018), _Monetary Policy According to HANK_** *(HANK transmission and redistribution channels)* \n", + " High-impact HANK framework showing that heterogeneity, liquidity, and general-equilibrium income effects dominate representative-agent transmission logic.\n", + "\n", + "5. **Parker, Souleles, Johnson, and McClelland (2013), _Consumer Spending and the Economic Stimulus Payments of 2008_** *(Household spending evidence / MPCs)* \n", + " Influential micro evidence of sizable spending responses to transfers, validating high-MPC mechanisms that heterogeneous-agent fiscal models rely on.\n", + "\n", + "Together, these five papers span the key pillars Dupor et al. (2023) builds on: identification of local fiscal effects, heterogeneous-agent theory, and micro evidence on consumption responses." + ], + "id": "c52e9d42" + } + ], + "metadata": { + "kernelspec": { + "display_name": "Python 3", + "language": "python", + "name": "python3" + }, + "language_info": { + "name": "python" + } + }, + "nbformat": 4, + "nbformat_minor": 5 +} \ No newline at end of file diff --git a/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_subsequent-literature.ipynb b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_subsequent-literature.ipynb new file mode 100644 index 00000000..66456d13 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_subsequent-literature.ipynb @@ -0,0 +1,57 @@ +{ + "cells": [ + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "# Subsequent literature (2019+)\n", + "\n", + "Since 2019, the literature most related to {cite:t}`Dupor2023-bn` has moved from asking whether fiscal multipliers are positive to asking which multiplier we mean, in which environment, and through which distributional channels it operates. A first direction is sharper theory of heterogeneous-agent transmission under realistic policy regimes. {cite:t}`fiscal_hagedorn_2019` formalizes a HANK environment with incomplete markets, nominal rigidities, and endogenous labor-market responses, showing that financing and monetary accommodation are first-order determinants of multiplier size. This work helped normalize the idea that a single \"fiscal multiplier\" is not a structural constant: it varies with deficits versus contemporaneous taxation, the policy rule followed by the central bank, and the distribution of marginal propensities to consume across households. That line is extended and systematized by {cite:t}`fiscal_auclert_2024`, which provides a unified modern framework for fiscal and monetary interactions in heterogeneous-agent models. The cutting-edge shift here is methodological as much as substantive: policy analysis is increasingly done in models disciplined by distributional moments and realistic household balance sheets rather than representative-agent shortcuts.\n", + "\n", + "A second direction is stronger emphasis on state dependence and nonlinearities. While post-crisis work had already suggested larger multipliers near the effective lower bound, newer papers investigate richer nonlinear mechanisms and sign asymmetries. {cite:t}`nonlinear_brinca_2019` and {cite:t}`understanding_barnichon_2021` push this agenda by showing that the effects of fiscal expansions and contractions need not be symmetric and may depend on labor-market slack, financing conditions, and the composition of shocks. In parallel, {cite:t}`heterogeneous_bernardini_2020` documents substantial variation in multiplier estimates around the Great Recession period, reinforcing the view that \"average\" multipliers can hide large cyclical and cross-country heterogeneity. Together, these papers moved the field away from point estimates toward conditional policy rules: when policymakers ask for a multiplier, the modern answer is \"conditional on regime, sign, and composition.\"\n", + "\n", + "A third direction, very close to the Dupor et al. research design, is local-to-aggregate mapping in spatial economies. Earlier regional IV designs established credible local treatment effects; the frontier is now to recover general-equilibrium propagation through production and trade linkages. {cite:t}`spatial_casas_2025` illustrates this trajectory with a spatial general-equilibrium treatment of local spending multipliers in EU regions, where cross-region demand and supply linkages are central rather than residual. This is conceptually aligned with the multi-region structure in {cite:t}`Dupor2023-bn`: local spending shocks generate spillovers that can make aggregate effects exceed local direct effects. The practical implication is that new empirical work increasingly combines regional quasi-experiments with explicit network or spatial structure, instead of treating spillovers as a nuisance. In the same spirit, {cite:t}`fiscal_sheremirov_2022` broadens external validity by comparing advanced and developing economies using military-spending variation, highlighting that institutions and macro regimes materially alter transmission.\n", + "\n", + "Related but distinct, another emerging branch studies household balance-sheet channels beyond standard transfer episodes. {cite:t}`macroeconomic_auclert_2019` (debt relief and bankruptcy protections) and {cite:t}`stock_chodorowreich_2021` (stock-market wealth and local labor markets) reinforce a broader post-2019 conclusion: fiscal and quasi-fiscal policies work through heterogeneous exposures to income, debt, and asset-price changes. This complements the consumption-MPC logic behind Dupor et al. and points to a richer notion of stimulus design where targeting depends not only on current income but also on liquidity, leverage, and wealth composition.\n", + "\n", + "Putting these strands together, the main research directions that emerged after 2019 are: (i) integrating fiscal and monetary policy in tractable HANK frameworks suitable for quantitative policy experiments; (ii) estimating regime-dependent, nonlinear multipliers rather than unconditional averages; (iii) connecting local causal estimates to national outcomes through explicit spatial and network propagation; and (iv) embedding household balance-sheet heterogeneity directly into fiscal design questions. The cutting edge now is not a single new estimate, but a synthesis: micro-founded heterogeneity plus credible quasi-experimental variation plus explicit aggregation structure. Under this view, the core contribution of {cite:t}`Dupor2023-bn` looks increasingly prescient, because it anticipated exactly this workflow by combining regional consumption evidence with a multi-region heterogeneous-agent model.\n" + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Most important papers for where the field is heading (3-5)\n", + "\n", + "1. **Auclert, Rognlie, and Straub (2024), _Fiscal and Monetary Policy with Heterogeneous Agents_** ({cite:t}`fiscal_auclert_2024`) \n", + " Most important unifying framework for joint fiscal-monetary analysis in HANK settings; likely to be the benchmark platform for policy counterfactuals.\n", + "\n", + "2. **Hagedorn, Manovskii, and Mitman (2019), _The Fiscal Multiplier_** ({cite:t}`fiscal_hagedorn_2019`) \n", + " Foundational quantitative result showing how incomplete markets and policy financing/monetary rules jointly determine multiplier magnitudes.\n", + "\n", + "3. **Barnichon, Debortoli, and Matthes (2021), _Understanding the Size of the Government Spending Multiplier: It's in the Sign_** ({cite:t}`understanding_barnichon_2021`) \n", + " Influential for the nonlinear and asymmetry agenda; moves the literature toward sign- and regime-contingent fiscal effects.\n", + "\n", + "4. **Bernardini, De Schryder, and Peersman (2020), _Heterogeneous Government Spending Multipliers in the Era Surrounding the Great Recession_** ({cite:t}`heterogeneous_bernardini_2020`) \n", + " Key empirical evidence that multiplier heterogeneity across states and periods is substantial, sharpening the case against one-size-fits-all estimates.\n", + "\n", + "5. **Casas et al. (2025), _A Spatial General Equilibrium Analysis of Local Public Spending Multipliers in the European Union Regions_** ({cite:t}`spatial_casas_2025`) \n", + " Represents the frontier local-to-aggregate spatial GE approach, where spillovers and interregional linkages are modeled explicitly.\n", + "\n", + "If you want a \"top 3 only\" version, the strongest core set is: {cite:t}`fiscal_auclert_2024`, {cite:t}`fiscal_hagedorn_2019`, and {cite:t}`understanding_barnichon_2021`.\n" + ] + } + ], + "metadata": { + "kernelspec": { + "display_name": "Python 3", + "language": "python", + "name": "python3" + }, + "language_info": { + "name": "python" + } + }, + "nbformat": 4, + "nbformat_minor": 5 +} diff --git a/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_summary.ipynb b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_summary.ipynb new file mode 100644 index 00000000..4b8e3c6d --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/Dupor2023-bn_summary.ipynb @@ -0,0 +1,167 @@ +{ + "cells": [ + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "# Paper Summary" + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "slide" + } + }, + "source": [ + "## Overview\n", + "\n", + "* Research Question: What is the effect of county level government spending on consumer spending?\n", + "* Part I: Empirics - The American Recovery and Reinvestment Act\n", + " * Calculate local fiscal multipliers using county level variation\n", + " * A $1 increase in county-level government spending increases local non-durable consumer\n", + "spending by $0.29 and local auto spending by $0.09\n", + "* Part II: Multi-region new Keynesian Model\n", + " * Heterogeneous households (idiosyncratic productivity shocks and discount factors)\n", + " * Incomplete markets\n", + " * Trade linkages" + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Prior Literature Summary\n", + "\n", + "The paper builds on three complementary strands. First, ARRA-based regional studies established credible local fiscal identification using formula-driven variation and instrumental-variables designs, showing that federal spending affected local employment, wages, and activity. A key takeaway from this line is that local estimates are informative but must be interpreted with care when drawing aggregate policy conclusions because spillovers and aggregation can materially change national effects.\n", + "\n", + "Second, modern heterogeneous-agent macroeconomics provided the mechanism linking micro behavior to aggregate multipliers. Incomplete-markets and HANK models emphasize liquidity constraints, unequal marginal propensities to consume, and redistribution channels, all of which can make fiscal policy more powerful than in representative-agent models, especially near the zero lower bound. Third, household-level evidence from tax rebates and wealth shocks documented sizable and heterogeneous spending responses, giving empirical discipline to these mechanisms.\n", + "\n", + "*For a more detailed discussion of the prior literature, see [Prior Literature](Dupor2023-bn_prior-literature.ipynb).*" + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Empirics\n", + "\n", + "TABLE 4\n", + "Local retail spending multipliers\n", + "| Spending category | Retail consumer spending (Nielsen, Retail Scanner) | | | |\n", + "| :--- | :--- | :--- | :--- | :--- |\n", + "| | OLS | IV | OLS | IV |\n", + "| Government spending | 0.20*** (0.06) | 0.26*** (0.07) | 0.11*** (0.04) | 0.11** (0.05) |\n", + "| Partial $F$ stat. | - | 137.1 | - | 112.0 |\n", + "| County controls/State F.E. | No | No | Yes | Yes |\n", + "| \\# of counties | 367 | 367 | 367 | 367 |\n" + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "slide" + } + }, + "source": [ + "## Household's maximization problem\n", + "\n", + "\\begin{align*}\n", + "V_{t}\\left(x_{t}, a_{t}, \\beta ; \\phi_{i, t}\\right)= & \\max _{c_{t}, a_{t+1}, h_{t}}\\left\\{\\log \\left(c_{t}\\right)+\\psi \\frac{\\left(1-h_{t}\\right)^{1-\\theta}}{1-\\theta}\\right. \\\\\n", + "& \\left.+\\beta \\sum_{x_{t+1}} \\Gamma_{x_{t}, x_{t+1}} V_{t+1}\\left(x_{t+1}, a_{t+1}, \\beta ; \\phi_{i, t+1}\\right)\\right\\} \\tag{4.3}\\\\\n", + "\\text { s.t. } \\quad & c_{t}+a_{t+1}=w_{i, t} x_{t} h_{t}-\\mathcal{T}(.)+\\left(1+r_{i, t}\\right) a_{t}+(1-\\omega) \\delta\\left(x_{t}\\right) D_{i, t}, \\tag{4.4}\\\\\n", + "& a_{t+1} \\geq 0 . \\tag{4.5}\n", + "\\end{align*}\n", + "\n", + "where $c$ denotes consumption, $h$ denotes work, $\\psi$ is a parameter governing utility of leisure, $\\theta$ is the Frisch elasticity of labour supply, $\\beta$ is the idiosyncratic discount factor, $\\Gamma$ is a transition matrix approximating the productivity shock process $x$, $a$ denotes assets saved in a regional mutual fund, $w$ denotes wages, $\\mathcal{T}$ is the tax schedule, and $\\delta\\left(x\\right) D$ is the share of dividends received by households." + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Regional Mutual Fund\n", + "\n", + "There is a mutual fund in each region. The fund collects savings from local households, $A_{i, t+1}= \\int_{\\phi_{i, t}} a_{i, t+1}$. The fund next purchases government bonds, $B_{i, t+1}^{m}$, and shares, $s_{i, t+1}$, that represent claims on the profits of intermediate firms in region $i$. The price of each share (relative to the price of the final good) is $q_{i, t}$. The mutual fund chooses $B_{i, t+1}^{m}$ and $s_{i, t+1}$ to maximize its real long-run profits:\n", + "\n", + "\n", + "\\begin{align*}\n", + "V_{i, t}^{m}= & \\left(1+R_{t-1}\\right) B_{i, t}^{m}+\\left(q_{i, t}+\\left(1-\\tau_{d}\\right) \\omega D_{i, t}\\right) s_{i, t}-\\left(1+\\pi_{i, t+1}\\right) B_{i, t+1}^{m}-q_{i, t} s_{i, t+1} \\\\\n", + "& +\\frac{1}{1+r_{i, t+1}} V_{i, t+1}^{m} . \\tag{4.6}\n", + "\\end{align*}\n", + "\n", + "where $R$ is the global nominal interest rate, \\pi_{i} is the regional inflation rate, and $1+r_{i} = \\frac{1+R}{1+\\pi_{i}}$ is the regional real interest rate.\n", + "\n", + "Then the optimal amount of total savings in region $i$ is given by\n", + "\n", + "\\begin{equation*}\n", + "A_{i, t+1}=\\left(1+\\pi_{i, t+1}\\right) B_{i, t+1}^{m}+q_{i, t} s_{i, t+1} \\tag{4.10}\n", + "\\end{equation*}" + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Closing the model\n", + "\n", + "The model also includes intermediate goods firms, final goods firms, a monetary authority, and fiscal authority. All of these are standard to the multi-region NK model. " + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "slide" + } + }, + "source": [ + "## Results\n", + "\n", + "![Impulse responses](figures/irfs.jpg)\n", + "Impulse responses to a government spending shock\n", + "\n", + "Notes: Impulse response functions for a temporary government spending shock. All units are in per-capita terms and are expressed as percentage deviations from their steady state. For the inflation rate, we report the deviation from the steady state in levels.\n" + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Subsequent Literature and Research Directions\n", + "\n", + "Recent work (2019 and later) shifts the field from asking for a single average multiplier to asking how fiscal effects depend on policy regime, macro state, and household heterogeneity. One major direction is integrated fiscal-monetary analysis in heterogeneous-agent frameworks: newer HANK-based models show that financing choices (deficit versus tax financing), monetary accommodation, and the distribution of liquidity across households are first-order determinants of multiplier size.\n", + "\n", + "A second direction emphasizes nonlinear and state-dependent effects. Evidence and theory now highlight that multipliers can vary across expansions and downturns, and can be asymmetric for spending increases versus consolidations. A third direction extends regional designs into spatial general-equilibrium settings that explicitly model trade and production linkages across regions, improving the mapping from local causal effects to aggregate outcomes.\n", + "\n", + "The cutting edge is the synthesis of these strands: credible quasi-experimental local evidence, rich heterogeneous-agent macro structure, and explicit aggregation/spillover mechanisms. For this paper's agenda, the most important frontier implication is that local consumption responses are increasingly viewed as key identified moments that must be interpreted through multi-region general-equilibrium models rather than in isolation.\n", + "\n", + "*For a more detailed discussion of the subsequent literature, see [Subsequent Literature](Dupor2023-bn_subsequent-literature.ipynb).*" + ] + } + ], + "metadata": { + "celltoolbar": "Slideshow", + "kernelspec": { + "display_name": ".venv-linux-x86_64", + "language": "python", + "name": "python3" + }, + "language_info": { + "codemirror_mode": { + "name": "ipython", + "version": 3 + }, + "file_extension": ".py", + "mimetype": "text/x-python", + "name": "python", + "nbconvert_exporter": "python", + "pygments_lexer": "ipython3", + "version": "3.12.3" + } + }, + "nbformat": 4, + "nbformat_minor": 2 +} diff --git a/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/figures/irfs.jpg b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/figures/irfs.jpg new file mode 100644 index 00000000..c119d130 Binary files /dev/null and b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/figures/irfs.jpg differ diff --git a/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/index.md b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/index.md new file mode 100644 index 00000000..5855f7e7 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/index.md @@ -0,0 +1,15 @@ +--- +title: "Regional Consumption Responses and the Aggregate Fiscal Multiplier -- Ballpark Entry" +--- + +```{include} Dupor2023-bn_intro.ipynb +``` + +```{include} Dupor2023-bn_summary.ipynb +``` + +```{include} Dupor2023-bn_prior-literature.md +``` + +```{include} Dupor2023-bn_subsequent-literature.md +``` \ No newline at end of file diff --git a/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/myst.yml b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/myst.yml new file mode 100644 index 00000000..e543d341 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/myst.yml @@ -0,0 +1,14 @@ +version: 1 +project: + title: "Regional Consumption Responses and the Aggregate Fiscal Multiplier — Ballpark Entry" + bibliography: + - self.bib + - references.bib + - subsequent-literature.bib + toc: + - file: Dupor2023-bn_intro.ipynb + - file: Dupor2023-bn_prior-literature.ipynb + - file: Dupor2023-bn_summary.ipynb + - file: Dupor2023-bn_subsequent-literature.ipynb +site: + title: "Regional Consumption Responses and the Aggregate Fiscal Multiplier — Ballpark Entry" \ No newline at end of file diff --git a/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/references.bib b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/references.bib new file mode 100644 index 00000000..aa0e6341 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/references.bib @@ -0,0 +1,1363 @@ +@ARTICLE{Floden1998-cz, + title = "Idiosyncratic risk in the {U}.s. and Sweden: Is there a role for + government insurance?", + author = "Flodén, Martin and Lindé, J", + month = sep, + year = 1998 +} + +@ARTICLE{Eggertsson2009-yu, + title = "Federal Reserve Bank of New York Staff Reports What Fiscal Policy Is + Effective at Zero Interest Rates ?", + author = "Eggertsson, Gauti B", + year = 2009 +} + +@ARTICLE{HagedornUnknown-qq, + title = "Federal reserve bank of New York staff reports the role of macro + effects unemployment benefits and unemployment in the great + recession: The role of macro effects", + author = "Hagedorn, Marcus and Karahan, Fatih and Manovskii, I and Mitman, K" +} + +@ARTICLE{Sahm2011-ta, + title = "Check in the mail or more in the paycheck: Does the effectiveness + of fiscal stimulus depend on how it is delivered?", + author = "Sahm, Claudia and Shapiro, Matthew D and Slemrod, Joel B", + journal = "SSRN Electron. J.", + publisher = "Elsevier BV", + year = 2011, + language = "en" +} + +@ARTICLE{Drautzburg2015-ie, + title = "Fiscal stimulus and distortionary taxation", + author = "Drautzburg, Thorsten and Uhlig, Harald", + journal = "Rev. Econ. Dyn.", + publisher = "Elsevier BV", + volume = 18, + number = 4, + pages = "894--920", + abstract = "We quantify the fiscal multipliers in response to the American + Recovery and Reinvestment Act (ARRA) of 2009. We extend the + benchmark medium-scale New Keynesian model, allowing for + credit-constrained households, the zero lower bound, government + capital, and distortionary taxation. The posterior yields + modestly positive short-run multipliers around 0.53 and modestly + negative long-run multipliers around −0.36. We compare and relate + recent literature multiplier calculations to ours. We explain the + central empirical findings with the help of a simple three + equation New Keynesian model with sticky wages and + credit-constrained households.", + month = oct, + year = 2015, + language = "en" +} + +@ARTICLE{Wilson2012-bc, + title = "Fiscal spending jobs multipliers: Evidence from the 2009 American + Recovery and Reinvestment Act", + author = "Wilson, Daniel J", + journal = "Am. Econ. J. Econ. Policy", + publisher = "American Economic Association", + volume = 4, + number = 3, + pages = "251--282", + abstract = "This paper estimates the “jobs multiplier” of fiscal stimulus + spending using the state-level allocations of federal stimulus + funds from the American Recovery and Reinvestment Act (ARRA) of + 2009. Because the level and timing of stimulus funds that a state + receives was potentially endogenous, I exploit the fact that most + of these funds were allocated according to exogenous formulary + allocation factors such as the number of federal highway miles in + a state or its youth share of population. Cross-state IV results + indicate that ARRA spending in its first year yielded about eight + jobs per million dollars spent, or \$125,000 per job. (JEL E24, + E62, H72, H75, R23)", + month = aug, + year = 2012, + language = "en" +} + +@ARTICLE{Baxter1990-mo, + title = "Fiscal policy in general equilibrium", + author = "Baxter, Marianne and King, R", + journal = "The American Economic Review", + volume = 83, + pages = "315--334", + year = 1990 +} + +@ARTICLE{Chodorow-Reich2012-bo, + title = "Does state fiscal relief during recessions increase employment? + Evidence from the American Recovery and Reinvestment Act", + author = "Chodorow-Reich, Gabriel and Feiveson, Laura and Liscow, Zachary + and Woolston, William Gui", + journal = "Am. Econ. J. Econ. Policy", + publisher = "American Economic Association", + volume = 4, + number = 3, + pages = "118--145", + abstract = "The American Recovery and Reinvestment Act (ARRA) of 2009 + included $88 billion of aid to state governments administered + through the Medicaid reimbursement process. We examine the effect + of these transfers on states' employment. Because state fiscal + relief outlays are endogenous to a state's economic environment, + OLS results are biased downward. We address this problem by using + a state's pre-recession Medicaid spending level to instrument for + ARRA state fiscal relief. In our preferred specification, a + state's receipt of a marginal $100,000 in Medicaid outlays + results in an additional 3.8 job-years, 3.2 of which are outside + the government, health, and education sectors. (JEL H75, I18, + I38, R23)", + month = aug, + year = 2012, + language = "en" +} + +@ARTICLE{McKay2016-pm, + title = "The role of automatic stabilizers in the {U}.{S}. business cycle", + author = "McKay, Alisdair and Reis, Ricardo", + journal = "Econometrica", + abstract = "Most countries have automatic rules in their tax-and-transfer + systems that are partly intended to stabilize economic + fluctuations. This paper measures how effective they are. We put + forward a model that merges the standard incomplete-markets model + of consumption and inequality with the new Keynesian model of + nominal rigidities and business cycles, and that includes most of + the main potential stabilizers in the U.S. data, as well as the + theoretical channels by which they may work. We find that the + conventional argument that stabilizing disposable income will + stabilize aggregate demand plays a negligible role on the + effectiveness of the stabilizers, whereas tax-and-transfer + programs that affect inequality and social insurance can have a + large effect on aggregate volatility. However, as currently + designed, the set of stabilizers in place in the United States has + barely had any effect on volatility. According to our model, + expanding safety-net programs, like food stamps, has the largest + potential to enhance the effectiveness of the stabilizers.", + year = 2016 +} + +@ARTICLE{Ferriere2018-aj, + title = "The heterogeneous effects of government spending: It’s all about + taxes", + author = "Ferriere, Axelle and Navarro, Gaston", + journal = "Int. Fin. Discuss. Pap.", + publisher = "Board of Governors of the Federal Reserve System", + volume = "2018.0", + number = 1237, + abstract = "This paper investigates how government spending multipliers + depend on the distribution of taxes across households. We exploit + historical variations in the financing of spending in the U.S. + since 1913 to show that multipliers are positive only when + financed with more progressive taxes, and zero otherwise. We + rationalize this finding within a heterogeneous-household model + with indivisible labor supply. The model results in a lower labor + responsiveness to tax changes for higher-income earners. In turn, + spending financed with more progressive taxes induces a smaller + crowding-out, and thus larger multipliers. Finally, we provide + evidence in support of the model’s cross-sectional implications.", + month = aug, + year = 2018 +} + +@ARTICLE{Conley2013-ca, + title = "The American Recovery and Reinvestment Act: Solely a government + jobs program?", + author = "Conley, Timothy G and Dupor, Bill", + journal = "J. Monet. Econ.", + publisher = "Elsevier BV", + volume = 60, + number = 5, + pages = "535--549", + abstract = "This paper estimates the private and government sector employment + effects of American Recovery and Reinvestment Act (ARRA) spending + via an instrumental variables strategy. We argue that this aid + was effectively fungible and states used it to offset declines in + revenue. This enables us to use exogenous variation in states’ + budget positions to identify the Act's employment effects. We + also exploit exogenous variation across states in ARRA highway + funding. According to our benchmark estimates, average state and + local government employment, during the 24 months following the + program's inception, was between 156,000 and 563,000 persons + greater as a result of ARRA spending (90\% confidence interval). + The corresponding estimate for the private sector ranges from a + loss of 182,000 to a gain of 1.1 million jobs. Our point estimate + for the implied cost of creating a job lasting one year is + \$202,000, which is substantially larger than the corresponding + estimate from the President's Council of Economic Advisors.", + month = jul, + year = 2013, + language = "en" +} + +@ARTICLE{Perotti2004-fu, + title = "Estimating the effects of fiscal policy in {OECD} countries", + author = "Perotti, Roberto", + journal = "SSRN Electron. J.", + publisher = "Elsevier BV", + abstract = "This paper studies the effects of fiscal policy on GDP, inflation + and interest rates in 5 OECD countries, using a structural Vector + Autoregression approach. Its main results can be summarized as + follows: 1) The effects of fiscal policy on GDP tend to be small: + government spending multipliers larger than 1 can be estimated + only in the US in the pre-1980 period. 2) There is no evidence + that tax cuts work faster or more effectively than spending + increases. 3) The effects of government spending shocks and tax + cuts on GDP and its components have become substantially weaker + over time; in the post-1980 period these effects are mostly + negative, particularly on private investment. 4) Only in the + post-1980 period is there evidence of positive effects of + government spending on long interest rates. In fact, when the + real interest rate is held constant in the impulse responses, + much of the decline in the response of GDP in the post-1980 + period in the US and UK disappears. 5) Under plausible values of + its price elasticity, government spending typically has small + effects on inflation. 6) Both the decline in the variance of the + fiscal shocks and the change in their transmission mechanism + contribute to the decline in the variance of GDP after 1980.", + year = 2004, + language = "en" +} + +@ARTICLE{Leduc2017-yn, + title = "Are state governments roadblocks to federal stimulus? Evidence on + the flypaper effect of highway grants in the 2009 recovery act", + author = "Leduc, Sylvain and Wilson, Daniel", + journal = "Am. Econ. J. Econ. Policy", + publisher = "American Economic Association", + volume = 9, + number = 2, + pages = "253--292", + abstract = "This paper examines how state governments adjusted spending in + response to the large temporary increase in federal highway + grants under the 2009 American Recovery and Reinvestment Act + (ARRA). The mechanism used to apportion ARRA highway grants to + states allows one to isolate exogenous changes in these grants. + The results indicate that states increased highway spending over + 2009 to 2011 more than dollar-for-dollar with the ARRA grants + they received. Rent-seeking efforts are shown to help explain + this result: states with more political contributions from the + public works sector to the governor and state legislators tended + to spend more out of their ARRA highway funds than other states. + (JEL H54, H76, R42, R53)", + month = may, + year = 2017, + language = "en" +} + +@ARTICLE{Dupor2015-nl, + title = "Schools and Stimulus", + author = "Dupor, William and Mehkari, M Saif", + journal = "wp", + publisher = "Federal Reserve Bank of St. Louis", + volume = 2015, + number = 004, + year = 2015 +} + +@ARTICLE{Sahm2010-sz, + title = "Household response to the 2008 tax rebate: Survey evidence and + aggregate implications", + author = "Sahm, Claudia R and Shapiro, Matthew D and Slemrod, Joel", + journal = "Tax Policy Econ.", + publisher = "University of Chicago Press", + volume = 24, + number = 1, + pages = "69--110", + month = jan, + year = 2010 +} + +@TECHREPORT{Hall2009-mz, + title = "By how much does {GDP} rise if the government buys more output?", + author = "Hall, Robert", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + month = nov, + year = 2009 +} + +@TECHREPORT{Auerbach2019-pi, + title = "Local fiscal multipliers and fiscal spillovers in the United + States", + author = "Auerbach, Alan and Gorodnichenko, Yuriy and Murphy, Daniel", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + abstract = "We estimate local fiscal multipliers and spillovers for the + United States using a rich dataset based on U.S. Department of + Defense contracts and a variety of outcome variables relating + to income and employment. We find strong positive spillovers + across locations and industries. Both backward linkages and + general equilibrium effects (e.g., income multipliers) + contribute to the positive spillovers. Geographical spillovers + appear to dissipate fairly quickly with distance. Our evidence + points to the relevance of Keynesian-type models that feature + excess capacity.", + month = jan, + year = 2019 +} + +@TECHREPORT{Ramey2009-jx, + title = "Identifying government spending shocks: It's all in the timing", + author = "Ramey, Valerie", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + month = oct, + year = 2009 +} + +@ARTICLE{Carroll2017-cp, + title = "The distribution of wealth and the marginal propensity to + consume: The distribution of wealth", + author = "Carroll, Christopher and Slacalek, Jiri and Tokuoka, Kiichi and + White, Matthew N", + journal = "Quant. Econom.", + publisher = "The Econometric Society", + volume = 8, + number = 3, + pages = "977--1020", + month = nov, + year = 2017, + language = "en" +} + +@ARTICLE{Guner2014-xr, + title = "Income taxation of {U}.{S}. households: Facts and parametric + estimates", + author = "Guner, Nezih and Kaygusuz, Remzi and Ventura, Gustavo", + journal = "Rev. Econ. Dyn.", + publisher = "Elsevier BV", + volume = 17, + number = 4, + pages = "559--581", + abstract = "We use micro data from the U.S. Internal Revenue Service to + document how Federal Income tax liabilities vary with income, + marital status and the number of dependents. We report facts on + the distributions of average taxes, properties of the joint + distributions of taxes paid and income, and discuss how taxes are + affected by marital status and the number of children. We also + provide multiple parametric estimates of tax functions for use in + applied work in macroeconomics and public finance.", + month = oct, + year = 2014, + language = "en" +} + +@ARTICLE{Christiano2011-ro, + title = "When is the government spending multiplier large?", + author = "Christiano, Lawrence and Eichenbaum, Martin and Rebelo, Sergio", + journal = "J. Polit. Econ.", + publisher = "University of Chicago Press", + volume = 119, + number = 1, + pages = "78--121", + month = feb, + year = 2011 +} + +@ARTICLE{Dupor2018-zh, + title = "A cup runneth over: Fiscal policy spillovers from the 2009 + recovery act", + author = "Dupor, Bill and McCrory, Peter B", + journal = "Econ. J. (London)", + publisher = "Oxford University Press (OUP)", + volume = 128, + number = 611, + pages = "1476--1508", + abstract = "This paper studies the effects of interregional spillovers from + the government spending component of the American Recovery and + Reinvestment Act of 2009 (the Recovery Act). Using cross-county + Census Journey to Work commuting data, we cluster U.S. counties + into local labor markets, each of which we further partition into + two subregions. We then compare differential labor market + outcomes and Recovery Act spending at the regional and + subregional levels using instrumental variables. Our instrument + is the sum of spending by federal agencies not instructed to + allocate Recovery Act funds according to the severity of local + downturns. Among pairs of subregions, we find evidence of fiscal + policy spillovers. According to our benchmark specification, $1 + of Recovery Act spending in a subregion increases its own wage + bill by $0.64 and increases the wage bill in its neighboring + subregion by \$0.50 during the rst two years following the act's + passage. We find similar spillover effects when we replace the + wage bill with employment as our measure of economic activity. + The spillover effect occurs in the service sector, whereas the + direct effect occurs in both the services and goods producing + sector. Also, we estimate cross-sectional regressions at various + levels of aggregation. The estimated effect of stimulus spending + increases with the level of aggregation, as greater aggregation + subsumes geographic spillovers into the own-region effect of + spending.", + month = jun, + year = 2018, + language = "en" +} + +@ARTICLE{Backus1993-vy, + title = "Consumption and real exchange rates in dynamic economies with + non-traded goods", + author = "Backus, David K and Smith, Gregor W", + journal = "J. Int. Econ.", + publisher = "Elsevier BV", + volume = 35, + number = "3-4", + pages = "297--316", + abstract = "We examine the possibility that non-traded goods may account for + several striking features of international macroeconomic data: + large, persistent deviations from purchasing power parity, small + correlations of aggregate consumption fluctuations across + countries, and substantial international real interest rate + differentials. A dynamic, exchange economy is used to show that + non-traded goods in principle can account for each of these + phenomena. In the theory there is a close relation between + fluctuations in consumption ratios and those in bilateral real + exchange rates, but we find little evidence for this relation in + time-series data for eight OECD countries.", + month = nov, + year = 1993, + language = "en" +} + +@BOOK{Tanner2003-bp, + title = "Unemployment Benefits", + author = "Tanner, Jane", + publisher = "CQ Press", + address = "2455 Teller Road, Thousand Oaks California 91320 United States", + year = 2003 +} + +@TECHREPORT{Serrato2016-wo, + title = "Estimating Local Fiscal Multipliers", + author = "Serrato, Juan Carlos Suárez and Wingender, Philippe", + publisher = "National Bureau of Economic Research", + address = "Cambridge, MA", + abstract = "We propose a new source of cross-sectional variation that may + identify causal impacts of government spending on the economy. We + use the fact that a large number of federal spending programs + depend on local population levels. Every ten years, the Census + provides a count of local populations. Since a different method + is used to estimate non-Census year populations, this change in + methodology leads to variation in the allocation of billions of + dollars in federal spending. Our baseline results follow a + treatment-effects framework where we estimate the effect of a + Census Shock on federal spending, income, and employment growth + by re-weighting the data based on an estimated propensity score + that depends on lagged economic outcomes and observed economic + shocks. Our estimates imply a local income multiplier of + government spending between 1.7 and 2, and a cost per job of + \$30,000 per year. A complementary IV estimation strategy yields + similar estimates. We also explore the potential for spillover + effects across neighboring counties but we do not find evidence + of sizable spillovers. Finally, we test for heterogeneous effects + of government spending and find that federal spending has larger + impacts in low-growth areas.", + month = jul, + year = 2016 +} + +@ARTICLE{Aiyagari1994-qp, + title = "Uninsured idiosyncratic risk and aggregate saving", + author = "Aiyagari, S R", + journal = "Q. J. Econ.", + publisher = "Oxford University Press (OUP)", + volume = 109, + number = 3, + pages = "659--684", + abstract = "We present a qualitative and quantitative analysis of the + standard growth model modified to include precautionary saving + motives and liquidity constraints. We address the impact on the + aggregate saving rate, the importance of asset trading to + individuals, and the relative inequality of wealth and income + distributions.", + month = aug, + year = 1994, + language = "en" +} + +@ARTICLE{Parker2013-py, + title = "Consumer spending and the economic stimulus payments of 2008", + author = "Parker, Jonathan A and Souleles, Nicholas S and Johnson, David S + and McClelland, Robert", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 103, + number = 6, + pages = "2530--2553", + abstract = "We measure the change in household spending caused by receipt of + the economic stimulus payments of 2008, using questions added to + the Consumer Expenditure Survey and variation from the randomized + timing of disbursement. Households spent 12–30 percent (depending + on specification) of their payments on nondurable goods during + the three-month period of payment receipt, and a significant + amount more on durable goods, primarily vehicles, bringing the + total response to 50–90 percent of the payments. The responses + are substantial and significant for older, lower-income, and + home-owning households. Spending does not vary significantly with + the method of disbursement (check versus electronic transfer). + (JEL D12, D14, E21, E62)", + month = oct, + year = 2013, + language = "en" +} + +@ARTICLE{Ramey2018-rc, + title = "Government spending multipliers in good times and in bad: + Evidence from {US} historical data", + author = "Ramey, Valerie A and Zubairy, Sarah", + journal = "J. Polit. Econ.", + publisher = "University of Chicago Press", + volume = 126, + number = 2, + pages = "850--901", + month = apr, + year = 2018, + language = "en" +} + +@INCOLLECTION{Krueger2016-kh, + title = "Macroeconomics and household heterogeneity", + author = "Krueger, D and Mitman, K and Perri, F", + booktitle = "Handbook of Macroeconomics", + publisher = "Elsevier", + pages = "843--921", + series = "Handbook of Macroeconomics", + year = 2016, + language = "en" +} + +@ARTICLE{Chetty2009-am, + title = "Bounds on Elasticities with Optimization Frictions: A Synthesis of + Micro and Macro Evidence on Labor Supply", + author = "Chetty, Raj", + abstract = "How can price elasticities be identified when agents face + optimization frictions such as adjustment costs or inattention? I + derive bounds on structural price elasticities that are a function + of the observed effect of a price change on demand, the size of + the price change, and the degree of frictions. The degree of + frictions is measured by the utility losses agents tolerate to + deviate from the frictionless optimum. The bounds imply that + frictions affect intensive margin elasticities much more than + extensive margin elasticities. I apply these bounds to the + literature on labor supply. The utility costs of ignoring the tax + changes used to identify intensive margin labor supply + elasticities are typically less than 1\% of earnings. As a result, + small frictions can explain the differences between micro and + macro elasticities, extensive and intensive margin elasticities, + and other disparate findings. Pooling estimates from existing + studies, I estimate a Hicksian labor supply elasticity of 0.33 on + the intensive margin and 0.25 on the extensive margin after + accounting for frictions.", + year = 2009 +} + +@ARTICLE{Aladangady2017-zu, + title = "The effect of hurricane Matthew on consumer spending", + author = "Aladangady, Aditya and Aron-Dine, Shifrah and Dunn, Wendy E and + Feiveson, Laura and Lengermann, Paul and Sahm, Claudia", + journal = "SSRN Electron. J.", + publisher = "Elsevier BV", + year = 2017, + language = "en" +} + +@ARTICLE{Huggett2009-su, + title = "Federal Reserve Bank of St", + author = "Huggett, M", + year = 2009 +} + +@INCOLLECTION{Ramey2016-tn, + title = "Macroeconomic shocks and their propagation", + author = "Ramey, V A", + booktitle = "Handbook of Macroeconomics", + publisher = "Elsevier", + pages = "71--162", + series = "Handbook of Macroeconomics", + year = 2016, + language = "en" +} + +@TECHREPORT{Auclert2018-ii, + title = "The Intertemporal Keynesian Cross", + author = "Auclert, Adrien and Rognlie, Matthew and Straub, Ludwig", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + abstract = "We demonstrate the importance of intertemporal marginal + propensities to consume (iMPCs) in disciplining general + equilibrium models with heterogeneous agents and nominal + rigidities. In a benchmark case, the dynamic response of output + to a change in the path of government spending or taxes is + given by an equation involving iMPCs, which we call the + intertemporal Keynesian cross. Fiscal multipliers depend only + on the interaction between iMPCs and public deficits. We + provide empirical estimates of iMPCs and argue that they are + inconsistent with representative-agent, two-agent and one-asset + heterogeneous-agent models, but can be matched by models with + two assets. Quantitatively, models that match empirical iMPCs + predict deficit-financed fiscal multipliers that are larger + than one, even if monetary policy is active, taxation is + distortionary, and investment is crowded out. These models also + imply larger amplification of shocks that involve private + borrowing, as we illustrate in an application to deleveraging.", + month = sep, + year = 2018 +} + +@ARTICLE{Barro2010-yy, + title = "Macroeconomic effects from government purchases and taxes", + author = "Barro, Robert J and Redlick, Charles", + journal = "SSRN Electron. J.", + publisher = "Elsevier BV", + year = 2010, + language = "en" +} + +@ARTICLE{Imbs2015-pk, + title = "Elasticity optimism", + author = "Imbs, Jean and Mejean, Isabelle", + journal = "Am. Econ. J. Macroecon.", + publisher = "American Economic Association", + volume = 7, + number = 3, + pages = "43--83", + abstract = "On average, estimates of trade elasticities are smaller in + aggregate data than at sector level. This is an artifact of + aggregation. Estimations performed on aggregate data constrain + sector elasticities to homogeneity, which creates a heterogeneity + bias. The paper shows such a bias exists in two prominent + approaches used to estimate elasticities, which has meaningful + consequences for the calibration of the trade elasticity in + one-sector, aggregative models. With elasticities calibrated to + aggregate data, macroeconomic models can have predictions at odds + with the implications of their multi-sector counterparts. They do + not when elasticities are calibrated using a weighted average of + sector elasticities. (JEL C51, F13, F14, F41, O19)", + month = jul, + year = 2015, + language = "en" +} + +@TECHREPORT{Beraja2016-km, + title = "The aggregate implications of regional business cycles", + author = "Beraja, Martin and Hurst, Erik and Ospina, Juan", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + month = feb, + year = 2016 +} + +@ARTICLE{Aguiar2015-ij, + title = "Has consumption inequality mirrored income inequality?", + author = "Aguiar, Mark and Bils, Mark", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 105, + number = 9, + pages = "2725--2756", + abstract = "We revisit to what extent the increase in income inequality since + 1980 was mirrored by consumption inequality. We do so by + constructing an alternative measure of consumption expenditure + using a demand system to correct for systematic measurement error + in the Consumer Expenditure Survey. Our estimation exploits the + relative expenditure of high- and low-income households on + luxuries versus necessities. This double differencing corrects + for measurement error that can vary over time by good and income. + We find consumption inequality tracked income inequality much + more closely than estimated by direct responses on expenditures. + (JEL D31, D63, E21)", + month = sep, + year = 2015, + language = "en" +} + +@ARTICLE{Oh2012-ax, + title = "Targeted transfers and the fiscal response to the great recession", + author = "Oh, Hyunseung and Reis, Ricardo", + journal = "J. Monet. Econ.", + publisher = "Elsevier BV", + volume = 59, + pages = "S50--S64", + abstract = "Between 2007 and 2009, government expenditures increased rapidly + across the OECD countries. While economic research on the impact + of government purchases has flourished, in the data, most of the + increase in expenditures was in government transfers. After + documenting this fact, we argue that future research should focus + on the positive impact of transfers. Towards this, we present a + model in which there is no representative agent and Ricardian + equivalence does not hold because of uncertainty, imperfect + credit markets, and nominal rigidities. Targeted lump-sum + transfers are expansionary both because of a neoclassical wealth + effect and because of a Keynesian aggregate demand effect.", + month = dec, + year = 2012, + language = "en" +} + +@TECHREPORT{Auclert2018-bh, + title = "Inequality and aggregate demand", + author = "Auclert, Adrien and Rognlie, Matthew", + publisher = "National Bureau of Economic Research", + address = "Cambridge, MA", + abstract = "We explore the quantitative effects of transitory and persistent + increases in income inequality on equilibrium interest rates and + output. Our starting point is a Bewley-Huggett-Aiyagari model + featuring rich heterogeneity and earnings dynamics as well as + downward nominal wage rigidities. A temporary rise in inequality, + if not accommodated by monetary policy, has an immediate effect + on output that can be quantified using the empirical covariance + between income and marginal propensities to consume. A permanent + rise in inequality can lead to a permanent Keynesian recession, + which is not fully offset by monetary policy due to a lower bound + on interest rates. We show that the magnitude of the real + interest rate fall and the severity of the steady-state slump can + be approximated by simple formulas involving quantifiable + elasticities and shares, together with two parameters that + summarize the effect of idiosyncratic uncertainty and real + interest rates on aggregate savings. For plausible + parametrizations the rise in inequality can push the economy into + a liquidity trap and create a deep recession. Capital investment + and deficit-financed fiscal policy mitigate the fall in real + interest rates and the severity of the slump.", + month = feb, + year = 2018 +} + +@TECHREPORT{Farhi2012-oe, + title = "Fiscal multipliers: Liquidity traps and currency unions", + author = "Farhi, Emmanuel and Werning, Iván", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + month = sep, + year = 2012 +} + +@ARTICLE{Jappelli2014-og, + title = "Fiscal Policy and {MPC} Heterogeneity", + author = "Jappelli, Tullio and Pistaferri, Luigi", + journal = "Am. Econ. J. Macroecon.", + publisher = "American Economic Association", + volume = 6, + number = 4, + pages = "107--136", + abstract = "We use responses to survey questions in the 2010 Italian Survey + of Household Income and Wealth that ask consumers how much of an + unexpected transitory income change they would consume. We find + that the marginal propensity to consume (MPC) is 48 percent on + average, and that there is substantial heterogeneity in the + distribution. We find that households with low cash-on-hand + exhibit a much lower MPC than affluent households, which is in + agreement with models with precautionary savings where income + risk plays an important role. The results have important + implications for the evaluation of fiscal policy, and for + predicting household responses to tax reforms and redistributive + policies. In particular, we find that a debt-financed increase in + transfers of 1 percent of national disposable income targeted to + the bottom decile of the cash-on-hand distribution would increase + aggregate consumption by 0.82 percent. Furthermore, we find that + redistributing 1\% of national disposable from the top to the + bottom decile of the income distribution would boost aggregate + consumption by 0.1\%.", + month = oct, + year = 2014 +} + +@ARTICLE{Kaplan2020-oh, + title = "Non-durable consumption and housing net worth in the Great + Recession: Evidence from easily accessible data", + author = "Kaplan, Greg and Mitman, Kurt and Violante, Giovanni L", + journal = "J. Public Econ.", + publisher = "Elsevier BV", + volume = 189, + number = 104176, + pages = 104176, + month = sep, + year = 2020, + language = "en" +} + +@TECHREPORT{Hagedorn2019-op, + title = "The Fiscal Multiplier", + author = "Hagedorn, Marcus and Manovskii, Iourii and Mitman, Kurt", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + abstract = "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.", + month = feb, + year = 2019 +} + +@ARTICLE{Ramey1998-as, + title = "Costly capital reallocation and the effects of government + spending", + author = "Ramey, Valerie A and Shapiro, Matthew D", + journal = "Carnegie-Rochester Conf. Ser. Public Policy", + publisher = "Elsevier BV", + volume = 48, + pages = "145--194", + abstract = "Changes in government spending often lead to significant shifts + in demand across sectors. This paper analyzes the effects of + sector-specific changes in government spending in a two-sector + dynamic general equilibrium model in which the reallocation of + capital across sectors is costly. The two-sector model leads to a + richer array of possible responses of aggregate variables than + the one-sector model. The empirical part of the paper estimates + the effects of military buildups on a variety of macroeconomic + variables using a new measure of military shocks. The behavior of + macroeconomic aggregates is consistent with the predictions of a + multi-sector neoclassical model.", + month = jun, + year = 1998, + language = "en" +} + +@ARTICLE{Boone2014-ix, + title = "The political economy of discretionary spending: Evidence from + the American recovery and reinvestment act", + author = "Boone, Christopher and Dube, Arindrajit and Kaplan, Ethan", + journal = "Brookings Pap. Econ. Act.", + publisher = "Johns Hopkins University Press", + volume = 2014, + number = 1, + pages = "375--428", + abstract = "We study in this paper the spatial allocation of expenditures in + the American Recovery and Reinvestment Act (ARRA), one of the + largest discretionary funding bills in the history of the United + States. Contrary to both evidence from previous fiscal stimulus + programs and standard theories of legislative politics, we do not + find evidence of substantial political targeting. The districts + of party leaders did not receive more funds than those of + rank-and-file legislators, nor did the districts of pivotal + voters in the Senate or swing voters in the House receive more + money. While Democratic districts overall received more per + resident than Republican districts, this differential nearly + disappears when we consider award per worker in each district or + when we control for district poverty rate. Democratic states did + receive modestly greater funds, but this is largely due to higher + levels of funding going to places with more generous state + welfare programs. At the same time, we find no relationship + between the amount awarded and measures of the severity of the + downturn in the local economy, while we do find more funds + flowing to districts with higher levels of economic activity and + greater incidence of poverty. The results are consistent with the + discretionary component of ARRA being allocated through funding + formulas or based on project characteristics other than + countercyclical efficacy or political expediency, which stands in + contrast to evidence from fiscal stimulus in the New Deal. One + explanation suggests that over the past century, legislative + norms have reduced the scope of discretion—with attendant + benefits and costs.", + year = 2014 +} + +@ARTICLE{Nakamura2018-wz, + title = "Identification in macroeconomics", + author = "Nakamura, Emi and Steinsson, Jón", + journal = "J. Econ. Perspect.", + publisher = "American Economic Association", + volume = 32, + number = 3, + pages = "59--86", + abstract = "This paper discusses empirical approaches macroeconomists use to + answer questions like: What does monetary policy do? How large + are the effects of fiscal stimulus? What caused the Great + Recession? Why do some countries grow faster than others? + Identification of causal effects plays two roles in this process. + In certain cases, progress can be made using the direct approach + of identifying plausibly exogenous variation in a policy and + using this variation to assess the effect of the policy. However, + external validity concerns limit what can be learned in this way. + Carefully identified causal effects estimates can also be used as + moments in a structural moment matching exercise. We use the term + “identified moments” as a short-hand for “estimates of responses + to identified structural shocks,” or what applied microeconomists + would call “causal effects.” We argue that such identified + moments are often powerful diagnostic tools for distinguishing + between important classes of models (and thereby learning about + the effects of policy). To illustrate these notions we discuss + the growing use of cross-sectional evidence in macroeconomics and + consider what the best existing evidence is on the effects of + monetary policy.", + month = aug, + year = 2018, + language = "en" +} + +@ARTICLE{Chodorow-Reich2019-zl, + title = "Geographic cross-sectional fiscal spending multipliers: What have + we learned?", + author = "Chodorow-Reich, Gabriel", + journal = "Am. Econ. J. Econ. Policy", + publisher = "American Economic Association", + volume = 11, + number = 2, + pages = "1--34", + abstract = "A geographic cross-sectional fiscal spending multiplier measures + the effect of an increase in spending in one region of a monetary + union. Empirical studies of such multipliers have proliferated. I + review this research and what the evidence implies for national + multipliers. Based on an updated analysis of the ARRA and a + survey of empirical studies, my preferred point estimate for a + cross-sectional multiplier is 1.8. The paper also discusses + conditions under which the cross-sectional multiplier provides a + rough lower bound for the national, no-monetary-policy-response + multiplier. Putting these elements together, the cross-sectional + evidence suggests a national no-monetary-policy-response + multiplier of 1.7 or above. (JEL E32, E52, E62, H54, H76, R53)", + month = may, + year = 2019, + language = "en" +} + +@TECHREPORT{Dupor2014-hh, + title = "The 2009 recovery act: Stimulus at the extensive and intensive + labor margins", + author = "Dupor, Bill and Mehkari, M Saif", + publisher = "Federal Reserve Bank of St. Louis", + institution = "Federal Reserve Bank of St. Louis", + year = 2014 +} + +@ARTICLE{Barro1984-ue, + title = "Time-separable preferences and intertemporal-substitution models + of business cycles", + author = "Barro, Robert J and King, Robert G", + journal = "Q. J. Econ.", + publisher = "Oxford University Press (OUP)", + volume = 99, + number = 4, + pages = 817, + month = nov, + year = 1984 +} + +@ARTICLE{Nakamura2013-gl, + title = "Appendix to : Fiscal stimulus in a monetary union : Evidence from + {U} . s . regions", + author = "Nakamura, Emi and Steinsson, Jón", + year = 2013 +} + +@ARTICLE{Nakamura2011-dw, + title = "{NBER} {WORKING} {PAPER} {SERIES} {FISCAL} {STIMULUS} {IN} A + {MONETARY} {UNION}: {EVIDENCE} {FROM} {U}.{S}. {REGIONS}", + author = "Nakamura, Emi and Steinsson, J and Crouzet, Nicolas and Luo, Shaowen + and Nguyen, Thuy Lan and Davis, Steve and Eggertsson, Gauti B and + Galí, Jordi and Hurst, Erik and Mertens, Karel and Moreira, Marcelo + and Stock, James and Werning, I and Woodford, Michael and Yared, P + and Yogo, Motohiro", + year = 2011 +} + +@ARTICLE{Uhlig2010-yc, + title = "Some fiscal calculus", + author = "Uhlig, Harald", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 100, + number = 2, + pages = "30--34", + month = may, + year = 2010, + language = "en" +} + +@ARTICLE{Gali2008-jt, + title = "Optimal monetary and fiscal policy in a currency union", + author = "Galí, Jordi and Monacelli, Tommaso", + journal = "J. Int. Econ.", + publisher = "Elsevier BV", + volume = 76, + number = 1, + pages = "116--132", + abstract = "We lay out a tractable model for the analysis of optimal monetary + and fiscal policy in a currency union. The monetary authority + sets a common interest rate for the union, whereas fiscal policy + is implemented at the country level, through the choice of + government spending. In the presence of country-specific shocks + and nominal rigidities, the policy mix that is optimal from the + viewpoint of the union as a whole requires that inflation be + stabilized at the union level by the common central bank, whereas + fiscal policy has a country-specific stabilization role, one + beyond the efficient provision of public goods.", + month = sep, + year = 2008, + language = "en" +} + +@ARTICLE{Gervais2019-np, + title = "The tradability of services: Geographic concentration and trade + costs", + author = "Gervais, Antoine and Jensen, J Bradford", + journal = "J. Int. Econ.", + publisher = "Elsevier BV", + volume = 118, + pages = "331--350", + month = may, + year = 2019, + language = "en" +} + +@ARTICLE{House2020-ho, + title = "Austerity in the aftermath of the great recession", + author = "House, Christopher L and Proebsting, Christian and Tesar, Linda L", + journal = "J. Monet. Econ.", + publisher = "Elsevier BV", + volume = 115, + pages = "37--63", + month = nov, + year = 2020, + language = "en" +} + +@ARTICLE{Gali2007-ji, + title = "Understanding the effects of government spending on consumption", + author = "Galí, Jordi and López-Salido, J David and Vallés, Javier", + journal = "J. Eur. Econ. Assoc.", + publisher = "Oxford University Press (OUP)", + volume = 5, + number = 1, + pages = "227--270", + month = mar, + year = 2007, + language = "en" +} + +@ARTICLE{Hagedorn2016-un, + title = "A demand theory of the price level", + author = "Hagedorn, Marcus", + journal = "Econometric Modeling: Macroeconomics eJournal", + month = jun, + year = 2016 +} + +@ARTICLE{Carley2014-ik, + title = "The American Recovery and Reinvestment Act: Lessons from energy + program implementation efforts", + author = "Carley, Sanya and Hyman, Martin", + journal = "State Local Gov. Rev.", + publisher = "SAGE Publications", + volume = 46, + number = 2, + pages = "130--137", + abstract = "The American Recovery and Reinvestment Act injected approximately + US\$840 billion into the U.S. economy for job creation, + technological advancement, and infrastructure development. This + study examines energy-related Recovery Act program + implementation. The Recovery Act provided many immediate benefits + to the economy, environment, and energy sector, but + implementation was hindered by several conditions. This study + offers selected case studies and a set of lessons learned for + state officials.", + month = jun, + year = 2014, + language = "en" +} + +@TECHREPORT{Bee2012-xe, + title = "The validity of consumption data: Are the consumer expenditure + interview and diary surveys informative?", + author = "Bee, Adam and Meyer, Bruce and Sullivan, James", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + abstract = "This paper examines the quality of data collected in the + Consumer Expenditure (CE) Survey, which is the source for the + Consumer Price Index weights and is the main source of U.S. + consumption microdata. We compare reported spending on a large + number of categories of goods and services to comparable + national income account data. We do this separately for the two + components of the CE--the Interview Survey and the Diary + Survey--rather than a combination that has been used in past + comparisons. We find that most of the largest categories of + consumption are measured well in the Interview Survey as the + ratio to the national account data is close to one and has not + declined appreciably over time. Several other large categories + are reported at a low rate or have seen the ratio to the + national accounts decline over time. The results are less + encouraging for the Diary Survey. There is no large Diary + category that is both measured well and reported at a higher + rate than in the Interview Survey. We also compare the + ownership of and the value of durables, such as homes and cars, + in the CE to other sources. This evidence suggests the CE + performs fairly well. Based on observable characteristics, the + CE Survey appears to be fairly representative, although there + is strong evidence of under-representation at the top of the + income distribution and under-reporting of income and + expenditures at the top. We then examine the precision of the + two surveys and the frequency of no spending overall or for a + given spending category. In the Diary Survey, we find much + greater dispersion in spending and the dispersion relative to + the Interview Survey varies across goods and over time. Diary + respondents are much more likely to report zero spending for a + consumption category, and a high and increasing fraction of + respondents reporting zero for all categories. These results + suggest that using Diary data to assess inequality trends and + other distributional outcomes is likely to lead to biased and + misleading results. Our results have important implications for + interpreting and properly using CE data and how best to + redesign the CE.", + month = aug, + year = 2012 +} + +@ARTICLE{Woodford2011-jp, + title = "Simple analytics of the government expenditure multiplier", + author = "Woodford, Michael", + journal = "Am. Econ. J. Macroecon.", + publisher = "American Economic Association", + volume = 3, + number = 1, + pages = "1--35", + month = jan, + year = 2011 +} + +@ARTICLE{Ramey2019-go, + title = "Ten years after the financial crisis: What have we learned from + the Renaissance in fiscal research?", + author = "Ramey, Valerie A", + journal = "J. Econ. Perspect.", + publisher = "American Economic Association", + volume = 33, + number = 2, + pages = "89--114", + abstract = "This paper takes stock of what we have learned from the + “Renaissance” in fiscal research in the ten years since the + financial crisis. I first discuss the new innovations in + methodology and various strengths and weaknesses of the main + approaches to estimating fiscal multipliers. Reviewing the + estimates, I come to the surprising conclusion that the bulk of + the estimates for average spending and tax change multipliers lie + in a fairly narrow range, 0.6 to 1 for spending multipliers and + -2 to -3 for tax change multipliers. However, I identify economic + circumstances in which multipliers lie outside those ranges. + Finally, I review the debate on whether multipliers were higher + for the 2009 Obama stimulus spending in the United States or for + fiscal consolidations in Europe.", + month = may, + year = 2019, + language = "en" +} + +@ARTICLE{Gourio2010-si, + title = "Firm heterogeneity and the Long-run effects of dividend tax + reform", + author = "Gourio, François and Miao, Jianjun", + journal = "Am. Econ. J. Macroecon.", + publisher = "American Economic Association", + volume = 2, + number = 1, + pages = "131--168", + abstract = "To study the long-run effect of dividend taxation on aggregate + capital accumulation, we build a dynamic general equilibrium + model in which there is a continuum of firms subject to + idiosyncratic productivity shocks. We find that a dividend tax + cut raises aggregate productivity by reducing the frictions in + the reallocation of capital across firms. Our baseline model + simulations show that when both dividend and capital gains tax + rates are cut from 25 and 20 percent, respectively, to the same + 15 percent level permanently, the aggregate long-run capital + stock increases by about 4 percent.", + month = jan, + year = 2010 +} + +@ARTICLE{Huggett1993-ft, + title = "The risk-free rate in heterogeneous-agent incomplete-insurance + economies", + author = "Huggett, Mark", + journal = "J. Econ. Dyn. Control", + publisher = "Elsevier BV", + volume = 17, + number = "5-6", + pages = "953--969", + abstract = "Why has the average real risk-free interest rate been less than + one percent? The question is motivated by the failure of a class + of calibrated representative-agent economies to explain the + average return to equity and risk-free debt. I construct an + economy where agents experience uninsurable idiosyncratic + endowment shocks and smooth consumption by holding a risk-free + asset. I calibrate the economy and characterize equilibria + computationally. With a borrowing constraint of one year's + income, the resulting risk-free rate is more than one percent + below the rate in the comparable representative-agent economy.", + month = sep, + year = 1993, + language = "en" +} + +@ARTICLE{Kaplan2018-sr, + title = "Monetary policy according to {HANK}", + author = "Kaplan, Greg and Moll, Benjamin and Violante, Giovanni L", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 108, + number = 3, + pages = "697--743", + abstract = "We revisit the transmission mechanism from monetary policy to + household consumption in a Heterogeneous Agent New Keynesian + (HANK) model. The model yields empirically realistic + distributions of wealth and marginal propensities to consume + because of two features: uninsurable income shocks and multiple + assets with different degrees of liquidity and different returns. + In this environment, the indirect effects of an unexpected cut in + interest rates, which operate through a general equilibrium + increase in labor demand, far outweigh direct effects such as + intertemporal substitution. This finding is in stark contrast to + small- and medium-scale Representative Agent New Keynesian (RANK) + economies, where the substitution channel drives virtually all of + the transmission from interest rates to consumption. Failure of + Ricardian equivalence implies that, in HANK models, the fiscal + reaction to the monetary expansion is a key determinant of the + overall size of the macroeconomic response. (JEL D31, E12, E21, + E24, E43, E52, E62)", + month = mar, + year = 2018, + language = "en" +} + + +@ARTICLE{Floden2001-vb, + title = "Idiosyncratic risk in the United States and Sweden: Is there a + role for government insurance?", + author = "Floden, Martin and Lindé, Jesper", + journal = "Rev. Econ. Dyn.", + publisher = "Elsevier BV", + volume = 4, + number = 2, + pages = "406--437", + month = apr, + year = 2001, + language = "en" +} + +@ARTICLE{McKay2016-si, + title = "The power of forward guidance revisited", + author = "McKay, Alisdair and Nakamura, Emi and Steinsson, Jón", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 106, + number = 10, + pages = "3133--3158", + abstract = "In recent years, central banks have increasingly turned to + forward guidance as a central tool of monetary policy. Standard + monetary models imply that far future forward guidance has huge + effects on current outcomes, and these effects grow with the + horizon of the forward guidance. We present a model in which the + power of forward guidance is highly sensitive to the assumption + of complete markets. When agents face uninsurable income risk and + borrowing constraints, a precautionary savings effect tempers + their responses to changes in future interest rates. As a + consequence, forward guidance has substantially less power to + stimulate the economy. (JEL E21, E40, E50)", + month = oct, + year = 2016, + language = "en" +} + +@ARTICLE{Auclert2019-dr, + title = "Monetary policy and the redistribution channel", + author = "Auclert, Adrien", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 109, + number = 6, + pages = "2333--2367", + abstract = "This paper evaluates the role of redistribution in the + transmission mechanism of monetary policy to consumption. Three + channels affect aggregate spending when winners and losers have + different marginal propensities to consume: an earnings + heterogeneity channel from unequal income gains, a Fisher channel + from unexpected inflation, and an interest rate exposure channel + from real interest rate changes. Sufficient statistics from + Italian and US data suggest that all three channels are likely to + amplify the effects of monetary policy. (JEL E21, E31, E43, E52)", + month = jun, + year = 2019, + language = "en" +} + +@ARTICLE{Kaplan2014-ee, + title = "A Model of the Consumption Response to Fiscal Stimulus Payments", + author = "Kaplan, Greg and Violante, Giovanni L", + journal = "Econometrica", + abstract = "A wide body of empirical evidence, based on randomized + experiments, finds that 20-40 percent of fiscal stimulus payments + (e.g. tax rebates) are spent on non-durable household consumption + in the quarter that they are received. We develop a structural + economic model to interpret this evidence. Our model integrates + the classical Baumol-Tobin model of money demand into the + workhorse incomplete-markets life-cycle economy. In this + framework, households can hold two assets: a low-return liquid + asset (e.g., cash, checking account) and a high-return illiquid + asset (e.g., housing, retirement account) that carries a + transaction cost. The optimal life-cycle pattern of wealth + accumulation implies that many households are ``wealthy + hand-to-mouth'': they hold little or no liquid wealth despite + owning sizable quantities of illiquid assets. They therefore + display large propensities to consume out of additional income. We + document the existence of such households in data from the Survey + of Consumer Finances. A version of the model parametrized to the + 2001 tax rebate episode is able to generate consumption responses + to fiscal stimulus payments that are in line with the data.", + year = 2014 +} + +@ARTICLE{Mian2013-wr, + title = "Household balance sheets, consumption, and the economic slump", + author = "Mian, Atif and Rao, Kamalesh and Sufi, Amir", + journal = "Q. J. Econ.", + publisher = "Oxford University Press (OUP)", + volume = 128, + number = 4, + pages = "1687--1726", + abstract = "Abstract We investigate the consumption consequences of the + 2006–9 housing collapse using the highly unequal geographic + distribution of wealth losses across the United States. We + estimate a large elasticity of consumption with respect to + housing net worth of 0.6 to 0.8, which soundly rejects the + hypothesis of full consumption risk-sharing. The average marginal + propensity to consume (MPC) out of housing wealth is 5–7 cents + with substantial heterogeneity across ZIP codes. ZIP codes with + poorer and more levered households have a significantly higher + MPC out of housing wealth. In line with the MPC result, ZIP codes + experiencing larger wealth losses, particularly those with poorer + and more levered households, experience a larger reduction in + credit limits, refinancing likelihood, and credit scores. Our + findings highlight the role of debt and the geographic + distribution of wealth shocks in explaining the large and unequal + decline in consumption from 2006 to 2009.", + month = nov, + year = 2013, + language = "en" +} diff --git a/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/self.bib b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/self.bib new file mode 100644 index 00000000..f69c0867 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/self.bib @@ -0,0 +1,26 @@ +@ARTICLE{Dupor2023-bn, + title = "Regional Consumption Responses and the Aggregate Fiscal Multiplier", + author = "Dupor, Bill and Karabarbounis, Marios and Kudlyak, Marianna and + Saif Mehkari, M", + journal = "Rev. Econ. Stud.", + volume = 90, + number = 6, + pages = "2982--3021", + abstract = "We use regional variation in the American Recovery and + Reinvestment Act (2009–12) to analyse the effect of government + spending on consumer spending. Our consumption data come from + household-level retail purchases in the Nielsen scanner data and + auto purchases from Equifax credit balances. We estimate that a $1 + increase in county-level government spending increases local + non-durable consumer spending by $0.29 and local auto spending by + \$0.09. We translate the regional consumption responses to an + aggregate fiscal multiplier using a multi-region, new Keynesian + model with heterogeneous agents, incomplete markets, and trade + linkages. Our model is consistent with the estimated positive + local multiplier, a result that distinguishes our incomplete + markets model from models with complete markets. At the zero lower + bound, the aggregate consumption multiplier is twice as large as + the local multiplier because trade linkages propagate the effect + of government spending across regions.", + year = 2023 +} diff --git a/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/source/Dupor2023-bn.pdf b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/source/Dupor2023-bn.pdf new file mode 100644 index 00000000..6b7c66a6 Binary files /dev/null and b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/source/Dupor2023-bn.pdf differ diff --git a/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/source/Dupor2023-bn.tex b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/source/Dupor2023-bn.tex new file mode 100644 index 00000000..d7fd840a --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Dupor2023-bn/source/Dupor2023-bn.tex @@ -0,0 +1,1340 @@ +\documentclass[10pt]{article} +\usepackage[utf8]{inputenc} +\usepackage[T1]{fontenc} +\usepackage{amsmath} +\usepackage{amsfonts} +\usepackage{amssymb} +\usepackage[version=4]{mhchem} +\usepackage{stmaryrd} +\usepackage{hyperref} +\hypersetup{colorlinks=true, linkcolor=blue, filecolor=magenta, urlcolor=cyan,} +\urlstyle{same} +\usepackage{caption} +\usepackage{graphicx} +\usepackage[export]{adjustbox} +\graphicspath{ {./images/} } +\usepackage{multirow} + +\title{Regional Consumption Responses and the Aggregate Fiscal Multiplier } + +\author{BILL DUPOR\\ +Federal Reserve Bank of St. Louis\\ +MARIOS KARABARBOUNIS\\ +Federal Reserve Bank of Richmond\\ +MARIANNA KUDLYAK\\ +Federal Reserve Bank of San Francisco\\ +and\\ +M. SAIF MEHKARI\\ +University of Richmond} +\date{} + + +%New command to display footnote whose markers will always be hidden +\let\svthefootnote\thefootnote +\newcommand\blfootnotetext[1]{% + \let\thefootnote\relax\footnote{#1}% + \addtocounter{footnote}{-1}% + \let\thefootnote\svthefootnote% +} + +%Overriding the \footnotetext command to hide the marker if its value is `0` +\let\svfootnotetext\footnotetext +\renewcommand\footnotetext[2][?]{% + \if\relax#1\relax% + \ifnum\value{footnote}=0\blfootnotetext{#2}\else\svfootnotetext{#2}\fi% + \else% + \if?#1\ifnum\value{footnote}=0\blfootnotetext{#2}\else\svfootnotetext{#2}\fi% + \else\svfootnotetext[#1]{#2}\fi% + \fi +} + +\begin{document} +\maketitle +\captionsetup{singlelinecheck=false} +First version received August 2019; Editorial decision October 2022; Accepted January 2023 (Eds.) + +\begin{abstract} +We use regional variation in the American Recovery and Reinvestment Act (2009-12) to analyse the effect of government spending on consumer spending. Our consumption data come from householdlevel retail purchases in the Nielsen scanner data and auto purchases from Equifax credit balances. We estimate that a $\$ 1$ increase in county-level government spending increases local non-durable consumer spending by $\$ 0.29$ and local auto spending by $\$ 0.09$. We translate the regional consumption responses to an aggregate fiscal multiplier using a multi-region, new Keynesian model with heterogeneous agents, incomplete markets, and trade linkages. Our model is consistent with the estimated positive local multiplier, a result that distinguishes our incomplete markets model from models with complete markets. At the zero lower bound, the aggregate consumption multiplier is twice as large as the local multiplier because trade linkages propagate the effect of government spending across regions. +\end{abstract} + +Key words: Consumer spending, Fiscal multiplier, Regional variation, Heterogeneous agents\\ +JEL codes: E21, E62, H31, H71 + +\section*{1. INTRODUCTION} +If the government purchases $\$ 1$ worth of goods, by how much does private consumption increase or decrease? Although the question of the consumption response to government spending is very old, the literature still lacks consensus. For example, Ramey and Shapiro (1998) find that exogenous increases in defense spending decrease private consumption. On the other hand, Blanchard and Perotti (2002) and Gali et al. (2007) find that exogenous fiscal expansions increase private + +The editor in charge of this paper was Dirk Krueger.\\ +consumption. ${ }^{1}$ This disconnect is worrisome since consumer spending is the largest component of national income and its response is a key determinant of the fiscal multiplier. + +In this paper, we first estimate the response of consumer spending to fiscal stimulus. In particular, we use regional variation in the spending component of the American Recovery and Reinvestment Act (ARRA) to estimate the local effect of government spending on consumer spending. The local effect is the relative change in regional outcomes in response to a relative change in government spending across regions. ${ }^{2}$ + +Second, we translate the local fiscal multiplier to an aggregate fiscal multiplier using a multi-region, new Keynesian model with heterogeneous agents and incomplete markets. This is because estimates based on regional variation are not always representative of aggregate effects. Such estimates ignore general equilibrium effects that cannot be separately identified in cross-regional regressions (Nakamura and Steinsson, 2018; Chodorow-Reich, 2019). + +The ARRA, implemented between 2009 and 2012, was a very large programme by historical standards. The spending component of the Act allocated roughly $\$ 228$ billion. Our consumer spending data come from two separate sources. First, we collect store-level information on retail purchases from the Nielsen retail scanner data. Second, we construct individual-level spending on vehicles by measuring changes in auto credit balances from the FRB NY Consumer Credit Panel/Equifax. + +We estimate that a $\$ 1$ increase in ARRA spending within a county increases local nondurable spending by $\$ 0.29$ and local auto spending by $\$ 0.09$. We address potential endogeneity of government spending in two ways. First, we show that ARRA funding did not significantly target low-income areas. Second, we use a narrative instrumental variable approach. In particular, we identify components of ARRA funding that did not explicitly target local economic recovery. + +We translate our estimated local fiscal multiplier to an aggregate fiscal multiplier using a general equilibrium, two region, new Keynesian model. In the model, each region produces a final good, which is purchased by the local consumers as well as the government. The final good is produced using both local and foreign intermediate inputs. Due to home bias, final goods are produced using a larger share of local inputs. Trade linkages-expressed in the degree of home bias-provide one channel for government spending to affect economic activity across regions. The government maintains a fiscal union because it finances spending using federal taxes. The monetary authority targets a common nominal interest rate for all regions (currency union). + +Our multi-region model is novel in an important dimension: each region is populated by heterogeneous households who face incomplete asset markets (Huggett, 1993; Aiyagari, 1994). Heterogeneity in our model takes the form of idiosyncratic labour income shocks as well as permanent differences in the discount rate. Households self-insure using a risk-free government bond. Hence, our model combines a multi-region currency union model (e.g. Gali and Monacelli, 2008; Nakamura and Steinsson, 2014) with a heterogeneous agent, new Keynesian model (e.g. McKay et al., 2016; Kaplan et al., 2018). + +We calibrate the model using standard parameter values and targets as in typical new Keynesian models with heterogeneous agents. For the strength of trade linkages, we use data on shipments of goods across U.S. regions from the Commodity Flow Survey (CFS). Without + +\footnotetext{\begin{enumerate} + \item In a review of the literature and empirical methods, Hall (2009) finds a consumption multiplier from somewhat negative to 0.5 . Other recent contributions include Ramey (2011), Auerbach and Gorodnichenko (2012), Ramey (2016), and Ramey and Zubairy (2018). + \item Nakamura and Steinsson (2014) refer to this object, in a fiscal policy context, as the open economy relative multiplier. +\end{enumerate} +} +explicitly targeting the response, our model generates a local, non-durable consumption multiplier equal to 0.20 -fairly close to our estimate from the regional data. The aggregate consumption multiplier in our model is equal to 0.41 . + +Our model generates positive consumption responses at the local and the aggregate levels, which is generally difficult to deliver in more standard models. ${ }^{3}$ The key necessary element to generate a positive local multiplier is incomplete markets. With complete markets, any change in regional income is offset by transfers due to state-contingent claims. As a result, differences in regional consumer spending are pinned down only by differences in regional prices. And since regions with larger fiscal stimulus injections also experience higher inflation, the local consumption multiplier is negative (see, for example, Nakamura and Steinsson, 2014; Farhi and Werning, 2016; Chodorow-Reich, 2019). + +Heterogeneity is not necessary to generate a positive local or aggregate consumption response but it is important to generate substantial consumption responses consistent with the data. We show that a new Keynesian model with a representative agent in each region and incomplete markets across regions generates a positive but small local multiplier equal to 0.09 . The main reason for the larger consumption responses in our benchmark model is the substantial response of high-marginal-propensity to consume (MPC), labour-income-dependent households who experience an increase in their labour earnings. At an annual frequency, the average MPC in our model is 0.37 , which is consistent with the empirical evidence on the magnitude of non-durable consumption responses to unexpected income transfers (Carroll et al., 2017). The combined evidence of our local consumption multiplier and existing estimates of the MPC favour a new Keynesian model with heterogeneous agents over a new Keynesian model with a representative agent. + +The positive aggregate multiplier in the model also depends on our assumed passive monetary response to the fiscal stimulus. In our period of analysis, 2008-12, the Federal Reserve was at the zero lower bound (ZLB) of its policy rate and did not raise the rate in response to potential inflation pressures driven by the ARRA. Increased expected inflation in the face of an unchanged nominal rate reduces the real interest rate, leading households to increase consumption. Besides this standard effect of fiscal policy at the ZLB, a lower real interest rate also decreases the government's debt service cost which allows the government to engage in fiscal stimulus with a relatively small increase in taxes. ${ }^{4}$ + +The aggregate multiplier is twice as large as the local multiplier because trade linkages propagate government spending across regions. As trade linkages become stronger, regional consumption responses comove to a larger degree and the local multiplier-which is identified by the relative cross-regional responses-decreases. We empirically validate this mechanism using trade flows from the CFS. The local multiplier is lower when estimated from regions in close trade relationships than when estimated using regions in distant trade relationships. + +We show that one additional reason the aggregate multiplier is higher that the local multiplier is the passive stance of the monetary authority. If in our model the monetary policy actively responds to inflation pressures, the aggregate multiplier turns negative. Nonetheless, the\\ +3. The standard neoclassical model without capital exhibits a negative aggregate consumption multiplier (and thus a less-than-one output multiplier); government spending decreases consumption due to a negative wealth effect induced by higher taxes and also due to a higher real interest rate (Barro and King, 1984; Baxter and King, 1993; Woodford, 2011).\\ +4. The decrease in the government's debt service cost is a redistribution of resources from the private to the public sector, which hurts net savers, namely wealthy, low-MPC households. In contrast, the small adjustment in taxes affects a broader group of consumers including low-income, high-MPC households. Auclert (2019) analyses the redistribution channel from monetary policy to consumer spending.\\ +local multiplier remains positive and unaffected because the monetary policy is common across regions. + +Our model maps the empirical evidence on the local multiplier to an estimate for the aggregate multiplier. We show that when the model is also informed by the local multiplier, it delivers a tighter range of estimates for the aggregate multiplier relative to a model that is only informed by the MPC. + +Our paper contributes to the extensive literature on the consumption multiplier. One strand of the literature estimates the aggregate consumption multiplier using aggregate vector autoregressions (VARs) (e.g. Ramey and Shapiro, 1998; Blanchard and Perotti, 2002; Perotti, 2005; Barro and Redlick, 2011). A second strand estimates multipliers using dynamic general equilibrium models (for example, Baxter and King, 1993; Christiano et al., 2011; Drautzburg and Uhlig, 2015, to name a few). + +Our paper differs from this literature on two points. First, we use cross-regional variation to identify the (local) effect of fiscal stimulus on consumer spending. With disaggregate, geographical data, we use many more observations than typically used in the VAR studies. Moreover, we can identify exogenous variation in a much broader class of government spending than time-series studies which often rely on defense spending variation. Second, we translate the cross-regional variation into an aggregate consumption response using a quantitative model. Typical dynamic equilibrium models do not rely on any cross-regional or cross-sectional evidence. + +The closest paper to ours methodologically is Nakamura and Steinsson (2014), who use cross-state evidence to analyse the output effect of defense spending. Our paper analyses the cross-regional response of consumption using detailed micro-level evidence. Additionally, Nakamura and Steinsson (2014) employ a model with complete markets and rely on nonseparable preferences between consumption and leisure to match the empirical evidence of a local output multiplier larger than one. Our model, in contrast, generates a positive local consumption multiplier due to incomplete markets. + +We also contribute to the literature that uses regional variation to estimate regional effects of shocks or policies. These include work on the regional effects of house price shocks on consumer spending (Mian et al., 2013) and the effect of unemployment insurance across regions (Hagedorn et al., 2016). Another strand explicitly analyses the effect of fiscal stimulus on employment and income including Wilson (2012), Chodorow-Reich et al. (2012), Conley and Dupor (2013), Leduc and Wilson (2017), Serrato and Wingender (2016), for example. The above literature typically ignores general equilibrium effects. In contrast, we show how local estimates can vary from the aggregate using a general equilibrium model. + +Finally, we contribute to the growing literature that incorporates household heterogeneity and incomplete markets into a new Keynesian framework. Oh and Reis (2012) and McKay and Reis (2016) study the effects of government intervention on the U.S. business cycle. Hagedorn et al. (2017), Bhandari et al. (2018), and Auclert et al. (2018) study demand shocks and fiscal policy with heterogeneity and incomplete markets. McKay et al. (2016) and Kaplan et al. (2018) study the effects of monetary policy with heterogeneous agents. We extend this literature by incorporating multiple regions that are linked through trade, fiscal, and monetary policy. We show that, with multiple regions, the transmission of local fiscal policy depends on relative price adjustments and the strength of trade linkages, which are not considered in single-region heterogeneous agents models. + +The rest of the paper is structured as follows. Section 2 describes our data. Section 3 describes our empirical specifications and documents the basic empirical patterns regarding the local response of consumer spending to local government spending. Section 4 sets up the model. + +Section 5 describes our calibration and our main quantitative experiment. Section 6 analyses our results under different model specifications, and Section 7 concludes. + +\section*{2. DATA} +Our empirical analysis employs regional variation in government spending and consumer spending. We analyse data on government spending from the ARRA (2015). We use the NielsenIQ (2013) dataset to measure retail purchases. We use data on household auto financing from the FRB NY Consumer Credit Panel/Equifax (2017) (hereafter, CCP). The Nielsen and CCP data are available at a store/individual level with detailed geographical information (zip code). + +\subsection*{2.1. Consumer spending} +The Nielsen Retail Scanner data cover 2006 through 2014. ${ }^{5}$ Approximately 40,000 stores from ninety retail chains provide weekly point-of-sale information on units sold, average prices, universal product code (UPC) codes, and product characteristics. In 2010, the total sales in Nielsen stores constituted $42 \%$ of total sales in grocery stores and about $7 \%$ of total retail sales (excluding vehicle purchases). ${ }^{6}$ + +Purchases in the Nielsen dataset include a combination of non-durable and durable goods. The durable goods included in our data are fast-moving products and typically not very expensive. Examples include cameras and office supplies. We find that around $53 \%$ of annual spending takes place in grocery and discount stores. Hardware, home improvement, and electronics stores account for just $4 \%$ of annual spending. + +We measure auto spending using information on household auto finance loans, recorded in detailed data on individual debt for the Federal Reserve Bank of New York consumer credit panel. The CCP is a quarterly panel of administrative, anonymous, individual-level data, including consumer liabilities, some demographic information, credit scores, and home address zip codes. The total number of individuals in the Equifax panel is approximately 10 million. The number of vehicles purchased in our panel (we identify a purchase to have occurred when an individual's auto balance increases between the previous and the current quarter) closely tracks the number of newly (first-time) registered passenger cars across time (see Supplementary Material, Appendix A). Table 1 provides a summary of our consumer spending data. + +\subsection*{2.2. Government spending} +The ARRA had three major components-tax benefits, entitlements, and federal contracts and grants-with roughly a third of the total spending going to each. In this paper, we focus on the contracts and grants, which totalled roughly $\$ 228$ billion. Contracts and grants were spread\\ +5. This paper contains researcher(s)' own analyses calculated (or derived) based in part on data from Nielsen Consumer LLC and marketing databases provided through the NielsenIQ datasets at the Kilts Center for Marketing Data Center at The University of Chicago Booth School of Business. The conclusions drawn from the NielsenIQ data are those of the researcher(s) and do not reflect the views of NielsenIQ. NielsenIQ is not responsible for, had no role in, and was not involved in analysing and preparing the results reported herein. Information about the data and access are available at \href{http://research.chicagobooth.edu/nielsen/}{http://research.chicagobooth.edu/nielsen/}.\\ +6. A second source for consumer spending is the Nielsen HomeScan Consumer Panel Dataset which is a longitudinal panel of approximately 60,000 U.S. households who record information about their retail purchases, including shopping trip dates, the number of units purchased, UPC codes, and the total spending amounts. In Supplementary Material, Appendix A, we show that Retail Scanner data correlate more closely with aggregate time series from the Bureau of Economic Analysis relative to HomeScan data. + +\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 1\\ +Data sources for consumer spending} +\begin{tabular}{llll} +\hline +Spending category & \multicolumn{1}{c}{Source} & \# Stores/individuals & Time period \\ +\hline +Retail spending & Nielsen Retail Scanner & 40,000 stores & $2006-14$ \\ +Auto spending & CCP/Equifax & 10 million individuals & $2001-15$ \\ +\hline +\end{tabular} +\end{center} +\end{table} + +\begin{figure}[h] +\begin{center} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-06_969_1276_531_291} +\captionsetup{labelformat=empty} +\caption{Figure 1\\ +Government spending by U.S. counties} +\end{center} +\end{figure} + +Notes: Total amount of government spending during the period 2009-12 by U.S. counties (in millions of dollars).\\ +across many industries, including large amounts to transportation, infrastructure, energy, and (most significantly) education. + +To promote transparency, the federal government posted detailed information about each award on its \href{http://Recovery.gov}{Recovery.gov} website, including the total amount awarded, the total amount spent to date, the award date, and funding agency. The website also provided zip code identifiers not only for primary recipients but also for vendors, subcontractors, and other entities for each award. We assign spending to localities based on the ultimate receivers of each part of the award. For example, suppose an award was dispersed through a federal agency, which in turn was given to a state-level agency, which was then apportioned to several private entities. We locate spending using the various zip codes of those private entities. Figure 1 contains a county-level map of ARRA spending through 2012. Table 2 reports, at various percentiles, per-capita spending by county. + +\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 2\\ +Cross-sectional distribution of county-level government spending (per capita)} +\begin{tabular}{llllll} +\hline +Percentile & 10th & 25th & 50th & 75th & 90th \\ +\hline + & $\$ 172$ & $\$ 259$ & $\$ 420$ & $\$ 739$ & $\$ 1,312$ \\ +\hline +\end{tabular} +\end{center} +\end{table} + +Instrumental variable. A common challenge for identifying the effect of government stimulus on economic variables is that these programmes take place during times of economic distress. Similarly, in our case, it is possible that the money allocated to local communities explicitly targeted areas that were hit the hardest by the recession. To address this potential endogeneity, we determine components of the Act that were allocated using criteria orthogonal to the state of the local business cycle. + +Each agency responsible for dispersing Recovery Act dollars provided explicit criteria by which funds would be allocated. We use these criteria to distinguish between awards that explicitly targeted local economic recovery from awards that did not. For example, the ARRA's Department of Education support for children with disabilities was apportioned according to a county's relative population of children with disabilities rather than the local business cycle. As a second example, money provided through the Federal Highway Administration for road improvement and maintenance was distributed based upon population density and passenger miles travelled at the state level. Many awards that did not explicitly target local economic recovery relate to water quality assistance grants. The Environmental Protection Agency (EPA) instructions for state agencies were to select projects where water quality needs were the greatest, while priority was given to projects "ready to proceed to construction within 12 months" of the Act's passage. ${ }^{7}$ + +Our instrument is the sum within a county of all funds allocated by these agencies. The total amount of all dollars awarded through 2012 was $\$ 228$ billion, with $20.2 \%$ satisfying our selection criteria and therefore belonging to our instrument. + +Although the language used for the dispersion of funds included in our instrument did not explicitly target local economic recovery, it is possible that these awards were inadvertently allocated toward areas most affected by the recession. For example, even if water quality assistance grants were allocated based on environmental and not economic needs, they might have been implicitly directed toward low-income areas. To analyse if the Recovery Act spending correlates with local economic conditions, we use the following county-level regression: + + +\begin{equation*} +G_{j}=a+D_{s}+\beta \times X_{j}+\varepsilon_{j}, \tag{2.1} +\end{equation*} + + +where $G_{j}$ denotes the money awarded per household at county $j$ during the period 2009-12. We run the regression when $G_{j}$ is the total money awarded per household (denoted "Total") and separately for the case where $G_{j}$ is the subset of money allocated using our selected criteria (denoted "Instrument"). $D_{s}$ is a state dummy and $X_{j}$ denotes pre-Recovery Act county-level economic characteristics. These include per-capita income in 2007, the unemployment rate in 2007, the change in per-capita income between 2007 and 2009, and the change in the unemployment rate between 2007 and 2009. ${ }^{8}$ We run a separate regression for each local economic characteristic and report the estimates in Table 3. + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{6} + \item For a more detailed analysis of the selection criteria driving our narrative instrumental variable approach, see Dupor and Mehkari (2016) and Dupor and McCrory (2017). + \item When we expand the set of control variables to include the 2008 per-capita county income and unemployment, the results are little changed. +\end{enumerate} +}\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 3\\ +Recovery Act spending and local economic characteristics} +\begin{tabular}{|l|l|l|} +\hline +Recovery Act spending (2009-12) & Total & Instrument \\ +\hline +Per-capita county & 51.8 & 11.1 \\ +\hline +Income 2007 (/\$10,000) & (39.0) & (12.1) \\ +\hline +Change in per-capita county & -80.5 & 13.2 \\ +\hline +Income 2007-09 (/\$10,000) & (181.7) & (46.9) \\ +\hline +County unemployment & -57.1 & 22.1 \\ +\hline +Rate 2007 (p.p.) & (53.7) & (23.0) \\ +\hline +Change in county unemployment & -183.2*** & -34.5** \\ +\hline +Rate 2007-09 (p.p.) & (60.7) & (16.6) \\ +\hline +\end{tabular} +\end{center} +\end{table} + +Notes: Table shows results from the regression in equation (2.1). "Total" is the total amount of government spending while "instrument" is the fraction of spending allocated based on our selected criteria. We weight by county population and cluster standard errors at the state level. The standard errors are given in parentheses. One, two, and three stars denote significance at the $10 \%, 5 \%$, and $1 \%$ levels, respectively. + +Total spending is, for the most part, positively and not negatively correlated with economic characteristics, as economic targeting would imply. For example, counties with $\$ 10,000$ higher per-capita income in 2007 received an additional $\$ 52$ per capita. Our results are consistent with the analysis of Boone et al. (2014), who also find that there was no particular economic targeting in the Recovery Act. In all cases, our instrument mitigates the correlation between spending and pre-Recovery Act local economic conditions. We view this as supporting evidence that our selected criteria for the construction of the instrument are largely uncorrelated with the local business cycle. + +We also analyse if government spending is correlated with pre-trends in consumer spending (see details in Supplementary Material, Appendix C). We find that government spending does not correlate with either retail or auto spending during 2007 and 2008 (i.e. prior to the Act). Therefore, consumption pre-trends were broadly similar between the large-dollar and smalldollar recipient counties. + +\section*{3. THE LOCAL FISCAL MULTIPLIER} +\subsection*{3.1. Definitions and basic specification} +This section describes our empirical specification. We use two categories of consumer spending: retail spending and auto spending, available at the store and the household level, respectively. Let $c_{i, j, t}$ denote total spending of the household/store $i$ located in county $j$ during year $t . N_{j}$ is the number of households/stores in county $j$. We use a balanced panel (no new entry or exit of households/stores) and fix the population at its 2008 level. We construct the average household/store spending by averaging across all households/stores that are located in the county. Thus, $C_{j, t}=\sum_{i \in j} c_{i, j, t} / N_{j}$ is the average spending in county $j$. + +We summarize consumption responses by constructing cumulative changes in spending between the period 2008 and 2012 to coincide with the Recovery Act period: + + +\begin{equation*} +\Delta C_{j}=\sum_{t=2008}^{2012}\left\{C_{j, t}-C_{j, 2008}\right\} . \tag{3.1} +\end{equation*} + + +Our benchmark econometric model is + + +\begin{equation*} +\frac{\Delta C_{j}}{C_{j, 2008}}=a+\beta \times \frac{G_{j}}{C_{j, 2008}}+X_{j} \Phi^{\prime}+D_{s}+\varepsilon_{j} \tag{3.2} +\end{equation*} + + +The left-hand side variable in our regression is the cumulative growth rate of consumer spending relative to 2008: $\Delta C_{j} / C_{j, 2008}$. Our main explanatory variable is per-capita Recovery Act spending, denoted $G_{j}$. We estimate the number of households in each county by dividing county population by the average number of people per household. Our right-hand side variable is government spending normalized by the average consumer spending in year 2008: $G_{j} / C_{j, 2008}$. + +Using the same denominator on the left- and the right-hand side preserves the usual definition of the multiplier: $\beta$ is the dollar change in consumer spending if government spending increases by $\$ 1$. We include county-level controls through the vector $X_{j}$. These are population, 2007 and 2008 (per capita) incomes, and the 2007 and 2008 unemployment rates. Finally, we include a state fixed effect, $D_{s}$, in which $s$ is the state of county $j$. We estimate the model using, in turn, least squares and instrumental variables. Our instrument is non-targeted Recovery Act dollars. The exclusion restriction is that non-targeted Recovery Act government spending affects local consumption only through its effect on total ARRA government spending, conditional on state characteristics. + +In the first-stage regression (reported in Supplementary Material, Appendix B), we find that one extra dollar in the specific programmes that we include as part of the instrument is associated with $\$ 3.9$ spending in all types of programmes. The adjusted $R^{2}$ is 0.62 suggesting that the instrument has a strong predictive power on overall spending, but is not the only determinant. + +In each specification, we weigh each county by its population. Ramey (2019) highlights the importance of using population weights when using cross-regional variation. ${ }^{9}$ Furthermore, we cluster standard errors at the state level and winsorize the dependent and independent variable at the 1\% level. + +\subsection*{3.2. The effect of the Recovery Act on consumer spending} +Figure 2 contains a simple (by county) scatter plot of consumption growth from 2008 to 2012, for retail spending (left panel) and auto spending (right panel), against Recovery Act spending scaled by 2008 consumption spending. In both panels, higher government spending is associated with a higher consumption growth rate. ${ }^{10}$ + +The Recovery Act's effect on retail spending (Nielsen). In Table 4, we report estimates of our main regression (equation (3.2)) for retail consumer spending. We report separately ordinary least squares (OLS) and instrumental variable (IV) estimates as well as estimates with and without county controls/state fixed effects. + +In each specification, the local response of retail consumer spending to fiscal stimulus is positive. Excluding county controls and state fixed effects, the OLS and IV estimates are 0.20 and 0.26 , respectively. Including county controls and state fixed effects decreases both the OLS and IV estimated multipliers to 0.11 . + +Broader consumption multipliers using the Consumption Expenditure Survey. A possible concern with using the Nielsen dataset is that it captures a relatively narrow set of consumer\\ +9. Unweighted auto spending estimates increase substantially relative to our weighted estimates since Equifax/CCP provides a wide geographical representation of the U.S. including many small counties. On the other hand, the unweighted retail spending estimates are similar to the weighted estimates. We also use weights that take into account the relatively limited geographical coverage in Nielsen as in Aladangady et al. (2016). See Supplementary Material, Appendix C for details.\\ +10. The range of government spending values in the $x$-axis is wider in the auto spending case because Equifax has a richer geographical representation relative to Nielsen. + +\begin{figure}[h] +\begin{center} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-10_511_1278_204_287} +\captionsetup{labelformat=empty} +\caption{Figure 2\\ +Government spending and percentage change in retail and auto spending (2008-12), by counties\\ +Notes: Binned scatter plots between government spending (Recovery Act through 2012) and the percentage change in consumer spending, between 2008 and 2012, by county. The left panel shows changes in retail spending (Nielsen, Retail Scanner), and the right panel shows changes in auto spending (CCP/Equifax). The regression lines in both panels are estimated using population weights.} +\end{center} +\end{figure} + +\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 4\\ +Local retail spending multipliers} +\begin{tabular}{|l|l|l|l|l|} +\hline +\multirow[b]{2}{*}{Spending category} & \multicolumn{4}{|c|}{Retail consumer spending (Nielsen, Retail Scanner)} \\ +\hline + & OLS & IV & OLS & IV \\ +\hline +Government spending & 0.20*** (0.06) & 0.26*** (0.07) & 0.11*** (0.04) & 0.11** (0.05) \\ +\hline +Partial $F$ stat. & - & 137.1 & - & 112.0 \\ +\hline +County controls/State F.E. & No & No & Yes & Yes \\ +\hline +\# of counties & 367 & 367 & 367 & 367 \\ +\hline +\end{tabular} +\end{center} +\end{table} + +Notes: The table shows the estimates of the regression of the growth rate in retail spending on cumulative government spending at the county level during the period 2008-12. The standard errors are given in parentheses and are clustered at the state level. One, two, and three stars denote significance at the $10 \%, 5 \%$, and $1 \%$ levels, respectively.\\ +purchases. To translate our Nielsen estimates into a broader multiplier, we compare Nielsen-type purchases from the interview survey of the Consumption Expenditure Survey (CEX) (food at home, alcohol and beverage, detergents, cleaning products and other household products, small appliances, and personal care products) to more general types of spending. We focus on three consumption bundles. First, similarly to Kaplan et al. (2020), we construct a set of non-durable goods that includes, in addition to our Nielsen-based bundle, spending on apparel, tobacco, and reading. In this CEX-based bundle, spending is on average 1.3 times larger than the Nielsenbased one. Second, we construct an even broader spending group that adds services, such as food away from home, spending on entertainment, telephone services, utilities, gas, and public transportation. Spending on this bundle is on average 3.6 times larger than the Nielsen-based one. Finally, we construct a bundle that also adds durables, such as spending on education, furniture, car maintenance, and health. This bundle is on average 4.5 times larger than the Nielsen-based one. ${ }^{11}$ Table 5 shows a summary of goods included in each of the various bundles. + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{10} + \item The expenditure shares for similar bundles of goods in the diary survey are significantly larger. Nonetheless, according to Bee et al. (2012), the interview survey tracks aggregate spending more closely than the diary survey. The interview is designed to collect relatively larger expenditures and those that occur regularly. The diary is designed to +\end{enumerate} +}\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 5\\ +Nielsen and CEX} +\begin{tabular}{|l|l|l|l|l|l|} +\hline +Bundle & Spending categories & Nielsen estimate & Bundle size & Elasticity & Multiplier \\ +\hline +Nielsen & Food at home, alcohol and beverage, detergents, cleaning/hh products, small appliances, and personal care products & $0.11 \times$ & $1.0=$ & - & 0.11 \\ +\hline +Non-durables & Nielsen + apparel, tobacco, and reading & $0.11 \times$ & $1.3 \times$ & $0.98=$ & 0.14 \\ +\hline +Non-durables and services & Non-durables + food away from home, entertainment, telephone services, utilities, gas, and public transportation & $0.11 \times$ & $3.6 \times$ & $0.75=$ & 0.29 \\ +\hline +Non-durables and services, and durables & Non-durables and services + education, furniture, car maintenance, and health & $0.11 \times$ & $4.5 \times$ & $0.74=$ & 0.36 \\ +\hline +\end{tabular} +\end{center} +\end{table} + +Notes: Bundles of goods are constructed from the CEX for the period 2000-15. We report the size of each bundle compared to Nielsen-type spending as well as the elasticity estimated from regression (3.3). Broader multipliers are computed by multiplying the Nielsen estimate times the bundle size times the elasticity. + +We next estimate the elasticity of each broader spending measure to Nielsen-type spending. We estimate the following household-level regression using CEX data between 2000 and 2015: + + +\begin{equation*} +\log C_{i, t}^{j}=a+\Psi \times \log C_{i, t}^{\text {Nielsen }}+X_{i, t} \Phi^{\prime}+\varepsilon_{i, t}, \tag{3.3} +\end{equation*} + + +where $i$ denotes household, $t$ denotes time, and $j$ denotes one of the three broader bundles. We include, as household controls, a cubic on age and dummies on race, education, family type, and region, and use the weights provided by the survey. + +According to Aguiar and Bils (2015), high-income households in the CEX tend to underreport their spending relative to low-income households. To alleviate potential measurement error concerns, we follow the approach in Aguiar and Bils (2015) and instrument the households' current spending with their lagged spending. Table 5 shows the elasticities estimated by equation (3.3) when $C_{i, t}^{\text {Nielsen }}$ is instrumented by its lagged spending. + +We find that a $1 \%$ increase in Nielsen-type categories is associated with a $0.98 \%$ increase in non-durable consumer spending, a $0.75 \%$ increase in combined spending on non-durable goods and services, and a $0.74 \%$ increase on overall spending that also includes durables. The estimated elasticities without the instrument are lower. A $1 \%$ increase in Nielsen-type categories is associated with a $0.90 \%$ increase in non-durable consumer spending, a $0.57 \%$ increase in combined spending on non-durable goods and services, and a $0.54 \%$ increase on overall spending that also includes durables (see Supplementary Material, Appendix D). + +Multiplying the elasticity with the expenditure share and combining with our preferred estimate from Table 4 (which includes county controls/state fixed effects and uses the IV), we arrive at a local consumption multiplier equal to 0.14 for non-durable spending, equal to 0.29 for spending on non-durable goods and services, and equal to 0.36 for overall spending that also includes durables. + +\footnotetext{capture small, infrequent purchases that may be missed in the interview part. A detailed analysis of estimation results based on different surveys can be found in Supplementary Material, Appendix D. +}\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 6\\ +Local auto spending multipliers} +\begin{tabular}{|l|l|l|l|l|} +\hline +\multirow[b]{2}{*}{Spending category} & \multicolumn{4}{|c|}{Auto spending (CCP/Equifax)} \\ +\hline + & OLS & IV & OLS & IV \\ +\hline +Government spending & 0.07*** (0.01) & 0.11*** (0.01) & 0.06*** (0.01) & 0.09*** (0.01) \\ +\hline +Partial $F$ stat. & - & 248.5 & - & 187.9 \\ +\hline +County controls/state fixed effects & No & No & Yes & Yes \\ +\hline +\# of counties & 3,119 & 3,119 & 3,047 & 3,047 \\ +\hline +\end{tabular} +\end{center} +\end{table} + +Notes: The table shows the estimates of the regression of the growth rate in auto spending on cumulative government spending at the county level during the period 2008-12. The standard errors are given in parentheses and are clustered at the state level. One, two, and three stars denote significance at the $10 \%, 5 \%$, and $1 \%$ levels, respectively. + +The effect of the Recovery Act on auto spending (FRB NY Equifax data). We estimate a positive response of fiscal stimulus to auto spending (Table 6). ${ }^{12}$ In the specification which includes county controls/state fixed effects and uses the IV, we estimate a multiplier equal to 0.09 . Once more, the IV estimate is slightly higher than the OLS and county controls/state fixed effects reduce the difference between OLS and IV estimates. The CCP provides a much richer geographical representation of the U.S. relative to Nielsen. This explains the differences in the number of counties. + +Summing the consumption spending categories. We found a local retail spending multiplier from Nielsen Retail Scanner equal to 0.11 (Table 4). Using CEX data, we translated this estimate into a broader local multiplier equal to 0.14 for non-durable goods, 0.29 for combined spending on non-durable goods and services, and 0.36 for the bundle that also includes durable purchases (Table 5). Finally, we found a local auto spending multiplier from Equifax equal to 0.09 (Table 6). Since our definition of durable purchases did not include auto spending, by adding the local auto multiplier, we arrive at an estimate of the local consumption multiplier for overall spending equal to 0.45 . + +Our targeted multiplier in the model is the consumption multiplier derived from estimates of the bundle including non-durable goods and services (equal to 0.29 ). We find this appropriate as our model does not include investment in durable goods. + +\subsection*{3.3. Federal and sub-national government spending} +Our benchmark estimate of the local consumption multiplier relies on county-level variation in (federally funded) Recovery Act grants, within state borders. Existing research considers how federal Recovery Act spending influenced sub-national government spending: If the federally funded state governments cut (boosted) their own funding, this crowding out (in) would influence the estimate of the multiplier. + +We further explore the robustness of our approach to this issue and discuss under what conditions our exclusion restriction may be violated. We use data from the Annual Survey of State\\ +12. The response of auto vehicles spending to household tax rebates varies based on different studies. Johnson et al. (2006) do not find a significant impact on auto spending based on the 2001 tax rebates, while Parker et al. (2013) find a significant effect on spending of durables-in particular of vehicles-to the tax rebates of 2008. The 2008 payments were about twice the 2001 payments which may explain the differences between the studies. With respect to non-durable goods, both studies find similar results: a significant increase in non-durable spending. + +Government Finances, which contains annual state-level spending on current operations, capital outlays, and intergovernmental expenditures, and compute the state-level analogue of our federal spending variable. We find that for every Recovery Act dollar allocated by all programmes, states increased their total spending (relative to 2008) by a total of 1.5 dollars. ${ }^{13}$ + +In spite of this crowding-in, our specification with state fixed effects mitigates the upward bias since it controls for the confounding government spending at the state level, as long as counties within the state received the additional state spending in a uniform manner. Since we do not have sub-national government spending per county, we are not able to test this requirement. Yet, one way to deal with this problem is to consider the magnitude of upward bias resulting from a violation of the exclusion restriction. Specifically, we can see how crowding-in affects the multiplier by dividing the increase in consumer spending without state fixed effects (but with country controls) by 1.5 and obtain a multiplier of $0.12-0.15$, which is close to the specification with state fixed effects. + +Alternatively, we estimate that for every Recovery Act dollar allocated in our selected programmes that are part of the instrument, states spent (relative to 2008) a total 3.3 dollars. This implies a multiplier around 0.07 , which is again close to our benchmark estimates with state fixed effects. + +\subsection*{3.4. The effect of trade linkages on the local consumption multiplier} +The local consumption multiplier is identified from the relative cross-regional responses to relative cross-regional differences in government spending. Trade linkages are an important channel for government spending to affect economic activity across regions. When regions trade intensively with each other (a case resembling a low preference for local goods), the fiscal stimulus must generate a smaller relative response since government spending is spread through trade flows. In contrast, when counties are in distant trade relationships, the local multiplier must be relatively large since government spending is mostly absorbed by the recipient county. This mechanism is at the heart of our model (presented in the next section) and explains why the local multiplier turns out to be around half the aggregate multiplier. + +We test this mechanism using data on shipments of goods across U.S. states from the CFS. The data include information on commodities shipped, their value, and the origin and destination of the shipments. The largest trading partners of a state (based on the share of shipments exported) are often neighbouring states, although it is possible for states to trade intensively with relatively distant regions that maintain large economies. For example, the top two trading partners of Texas are Louisiana and California, of Minnesota are Wisconsin and Illinois, and of Florida are Georgia and Texas. + +Our objective is to split counties into high-trade, medium-trade, and low-trade groups. The local multiplier should be relatively higher in low-trade groups, since the stimulus remains largely local, and relatively lower in high-trade groups since the stimulus is shared between the regions. We formulate trade groups sequentially. In the case of high- (low-) trade groups, we start a group from an initial-unmatched-county and assign new counties in the group that have the largest (smallest) trade exposure with the existing counties in the group. ${ }^{14}$ We also consider a middle case where assignment of counties to groups occurs with half probability based + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{12} + \item The crowding-in of state spending in response to the Recovery Act is also documented by Leduc and Wilson (2017) and Chodorow-Reich (2019). Additional details on the regression appear in Supplementary Material, Appendix B. + \item Given our base sample of around 365 counties, we pick the number of counties in each group to be nine which gives around forty groups (as many as the number of states in our data). +\end{enumerate} +} +on high-trading partners and half based on low-trading partners (called "middle-trade groups"). We formally describe our algorithm in Supplementary Material, Appendix E. + +From the high-trade groups formed, $41 \%$ consist of groups with counties from the same state, $36 \%$ of counties that belong to two separate states, and $21 \%$ that belong to three or more states. The average distance between two counties in a group is 426 miles. On average, the share of exports toward counties in the same group is $6.1 \%$. All low-trade groups consist of counties belonging to three or more states, the average distance between two counties in the group is equal to 1016 miles, and the average share of exports is equal to $2.2 \%$. + +We estimate the local consumption multiplier for each case: (i) low-trade groups, (ii) medium-trade groups, and (iii) high-trade groups. We use the following specification (written for the case of low-trade groups, as an example): + + +\begin{equation*} +\frac{\Delta C_{j}}{C_{j, 2008}}=a+\beta^{\text {low }} \times \frac{G_{j}}{C_{j, 2008}}+X_{j} \Phi^{\prime}+\sum_{1}^{N} D_{j \in \mathcal{G}}+\varepsilon_{j} \tag{3.4} +\end{equation*} + + +The left-hand side variable is the cumulative growth rate of retail spending at county $j$ relative to 2008, and $G_{j}$ is the total money awarded per household in county $j$ during the period 2009-12. $X_{j}$ includes county-level controls which are population, 2007 and 2008 (per capita) incomes, and the 2007 and 2008 unemployment rates. $D_{j \in \mathcal{G}}$ is a group dummy: it takes the value of one if county $j$ belongs to a group $\mathcal{G}$ and zero otherwise. We use, in turn, least squares and instrumental variable regression. We run the same regressions for medium- and high-trade groups and derive $\beta^{\text {medium }}$ and $\beta^{\text {high }}$, respectively. + +The local multiplier, which is estimated from the response of the treated relative to the untreated, reflects the type of the trade group. Our hypothesis is that the relative response of the treated counties in a high-trade group should be smaller compared to the relative response of the treated counties in a low-trade group. + +Figure 3 plots the estimated local multipliers (the $\beta$ 's) for the case of high-, medium-, and low-trade groups (ordered from high to low to facilitate comparison with our model). The local consumption multiplier (both OLS and IV) clearly increases as trade openness decreases. According to our IV estimates, the local multiplier can increase by $30 \%$ if the stimulus is directed from high- to low-trade regions. All estimates are statistically different from zero at the $1 \%$ level. ${ }^{15}$ We demonstrate a similar relationship between trade intensity and the local consumption multiplier in our model by computing the local multiplier as we vary the underlying parameter that determines trade intensity. + +\section*{4. MODEL} +This section presents our model. It features multiple regions that engage in intermediate-input trade, heterogeneous households, and incomplete markets. + +\subsection*{4.1. Description of the economy} +The model is dynamic and solved in general equilibrium. In the model description below, we abstract from the time subscript $t$. The economy has $N=2$ regions: one (small) region and the + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{14} + \item The difference in the estimated low-trade and high-trade $\beta$ 's is equal to 0.05 with a standard error equal to 0.07 which yields a $p$-value equal to 0.24 . Detailed estimates used to construct the plot appear in Supplementary Material, Appendix E. As an additional exercise, we form groups based on geographical distance instead of trade flows. We find that as a group's geographical borders expand, the local multiplier increases since trade flows within the group likely become weaker. +\end{enumerate} +}\begin{figure}[h] +\begin{center} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-15_656_852_213_505} +\captionsetup{labelformat=empty} +\caption{Figure 3\\ +Local consumption multiplier and trade linkages\\ +Notes: The figure shows the estimate of the local consumption multiplier based on retail spending data. We run the regression in equation (3.4) for three cases: high-, medium-, and low-trade groups.} +\end{center} +\end{figure} + +rest of the economy. Nakamura and Steinsson (2014) also assume this geographical representation. To be consistent with our empirical evidence (which is based on county-level responses), we calibrate the size of the small region according to the population size of the average county in the U.S. + +Each region $i$ has its own real wage $w_{i}$ and inflation rate $\pi_{i}$. Each region produces a final good $Y_{i}$ using intermediate inputs produced by monopolistically competitive firms. There is a continuum of intermediate good firms in each region, indexed by $(i, j)$. Intermediate good firm $j$ located in region $i$ produces $y_{i, j}$ at price $p_{i, j}$. Regional trade takes place through trade in intermediate inputs. Regional trade flows are calibrated based on data from the CFS that combine shipments of final and intermediate goods. Through the lens of the model, we interpret all trade flows (including tradeable services) as trade in the intermediate sector and assume that the final goods are only locally consumed. ${ }^{16}$ + +The region $i$ population is denoted $\mu_{i}$ with $\sum_{i} \mu_{i}=1$. Populations do not vary across time. The regions are symmetric, i.e. per-capita variables are identical across regions at the steady state. In each region, there is a continuum of households making consumption, working, and saving decisions. Finally, there is a government buying final goods from each region. To finance expenditures, it taxes households' labour income. Taxation occurs only at the federal level (fiscal union). The government also supplies the nominal bond used by households as a savings instrument. Households in both regions face the same nominal interest rate $R$ (currency union). Therefore, there are two sources of market incompleteness in the model: first, across regions, and second, within regions. + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{15} + \item Our model allows trade in goods but not labour movement between regions. Auerbach et al. (2019) show that local federal spending does not pull in labour from nearby locations. House et al. (2020) also explore fiscal policy in a multi-country dynamic stochastic general equilibrium (DSGE) setup with explicit trade linkages. In their model, each country has a representative household. +\end{enumerate} +}Household-level variables are denoted with a small letter. Per-capita regional variables are denoted with capital letters. Aggregate variables are per-capita variables times the population rate. For example, consumption of a household in region $i$ is $c_{i}$, per-capita consumption in region $i$ is $C_{i}$, and aggregate consumption in region $i$ is $\mu_{i} C_{i}$. + +\subsection*{4.2. Households} +Each region is populated by a measure one continuum of households. Households derive utility from consumption (denoted $c$ ) and leisure. The good is fully consumed at the time of the purchase and does not provide any service beyond the current period. Hence, consumption corresponds to non-durable spending. A household is endowed with one unit of productive time, which it splits between work $h$ and leisure. Households' decisions depend on preferences represented by a time separable utility function of the form + + +\begin{equation*} +U=\mathbf{E}_{0}\left[\sum_{t=0}^{\infty} \beta^{t-1}\left\{\log \left(c_{i, t}\right)+\psi \frac{\left(1-h_{i, t}\right)^{1-\theta}}{1-\theta}\right\}\right], \tag{4.1} +\end{equation*} + + +where $\psi$ affects the utility from leisure and $\theta$ affects the Frisch elasticity of labour supply. ${ }^{17} \beta$ is the household's idiosyncratic discount factor which does not vary across time (Krueger et al., 2016; Hagedorn et al., 2017). Half of the households in each region are impatient ( $\beta= \bar{\beta}-\epsilon_{\beta}$ ) and half are patient ( $\beta=\bar{\beta}+\epsilon_{\beta}$ ). Discount factor heterogeneity allows the model to be consistent with evidence of non-durable consumption responses to tax rebates. + +Households consume only the final good produced in their region. They supply labour in the intermediate good sector of their region and receive real wage payments $w_{i}$. Their effective labour supply is $x h$ where $x$ is an idiosyncratic shock that follows an AR(1) process in logs: + + +\begin{equation*} +\log x_{t+1}=\rho \log x_{t}+\eta_{t+1} \quad \text { with } \eta_{t+1} \sim \operatorname{iid} N\left(0, \sigma_{\eta}^{2}\right) \tag{4.2} +\end{equation*} + + +Therefore, households are heterogeneous for two reasons: (i) they have different discount factors and (ii) they receive in every period different shocks to their productivity. The differences in patience and labour earnings result in differences in consumption and asset holdings. The transition matrix that approximates the autoregressive process in equation (4.2) is given by $\Gamma_{x x^{\prime}}$. + +In each period $t$, a household residing in region $i$ saves $a_{i, t+1}$ in a regional mutual fund. The mutual fund is discussed in detail below. One period later, the household receives from the mutual fund a real return equal to $r_{i, t+1}$. Following Kaplan et al. (2018), we assume that households receive a $1-\omega$ fraction of real dividends, $D_{i, t}$, directly from the local intermediate firms. This additional income is interpreted as the profit-sharing component of worker compensation such as bonuses, commissions, and stock options. The residual share of dividends $(1-\omega) D_{i, t}$ is distributed proportionately to workers' labour productivity $\delta(x)=x / \bar{x}$ where $\bar{x}$ is the average labour productivity. Finally, households pay income taxes on the sum of wage payments and bonuses, based on the tax schedule $\mathcal{T}($.$) . We denote the regional distribution of households$ across productivity, asset holdings, and discount rates as $\phi_{i}$. + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{16} + \item Given the utility specification, the Frisch elasticity of labour supply depends on both $\theta$ and the hours worked $h$. In Section 6, we analyse a utility function specified in terms of disultility of hours worked where $\theta$ is directly interpreted as the labour supply elasticity. +\end{enumerate} +}We write the decision problem of a household that resides in region $i$. For simplicity, we index only regional and not idiosyncratic variables by $i$. + + +\begin{align*} +V_{t}\left(x_{t}, a_{t}, \beta ; \phi_{i, t}\right)= & \max _{c_{t}, a_{t+1}, h_{t}}\left\{\log \left(c_{t}\right)+\psi \frac{\left(1-h_{t}\right)^{1-\theta}}{1-\theta}\right. \\ +& \left.+\beta \sum_{x_{t+1}} \Gamma_{x_{t}, x_{t+1}} V_{t+1}\left(x_{t+1}, a_{t+1}, \beta ; \phi_{i, t+1}\right)\right\} \tag{4.3}\\ +\text { s.t. } \quad & c_{t}+a_{t+1}=w_{i, t} x_{t} h_{t}-\mathcal{T}(.)+\left(1+r_{i, t}\right) a_{t}+(1-\omega) \delta\left(x_{t}\right) D_{i, t}, \tag{4.4}\\ +& a_{t+1} \geq 0 . \tag{4.5} +\end{align*} + + +\subsection*{4.3. Mutual fund} +There is a mutual fund in each region. The fund collects savings from local households, $A_{i, t+1}= \int_{\phi_{i, t}} a_{i, t+1}$. The fund next purchases government bonds, $B_{i, t+1}^{m}$, and shares, $s_{i, t+1}$, that represent claims on the profits of intermediate firms in region $i$. The price of each share (relative to the price of the final good) is $q_{i, t}$. The mutual fund chooses $B_{i, t+1}^{m}$ and $s_{i, t+1}$ to maximize its real long-run profits: + + +\begin{align*} +V_{i, t}^{m}= & \left(1+R_{t-1}\right) B_{i, t}^{m}+\left(q_{i, t}+\left(1-\tau_{d}\right) \omega D_{i, t}\right) s_{i, t}-\left(1+\pi_{i, t+1}\right) B_{i, t+1}^{m}-q_{i, t} s_{i, t+1} \\ +& +\frac{1}{1+r_{i, t+1}} V_{i, t+1}^{m} . \tag{4.6} +\end{align*} + + +The government bond costs $\$ 1$ and pays $(1+R)$ dollars where $R$ is the nominal interest rate. $\pi_{i, t+1}$ is the region-specific inflation rate defined as + + +\begin{equation*} +\pi_{i, t+1}=\frac{P_{i, t+1}}{P_{i, t}}-1 \tag{4.7} +\end{equation*} + + +where $P_{i}$ is the price of the final good in region $i$ (defined below). Each period, the mutual fund receives after-tax dividends $\left(1-\tau_{d}\right) \omega D_{i, t}$, where $\omega$ is the fraction of dividends not distributed directly as employment compensation. The mutual fund pays back households using the revenues from holding government bonds and shares (zero profit condition): + + +\begin{equation*} +\left(1+r_{i, t}\right) A_{i, t}=\left(1+R_{t-1}\right) B_{i, t}^{m}+\left(q_{i, t}+\left(1-\tau_{d}\right) \omega D_{i, t}\right) s_{i, t} \tag{4.8} +\end{equation*} + + +Solving the mutual fund's problem gives rise to a no-arbitrage condition: + + +\begin{equation*} +1+r_{i, t+1}=\frac{1+R_{t}}{1+\pi_{i, t+1}}=\frac{q_{i, t+1}+\left(1-\tau_{d}\right) \omega D_{i, t}}{q_{i, t}} \tag{4.9} +\end{equation*} + + +Combining equations (4.8) and (4.9) gives the total amount of savings in region $i$ : + + +\begin{equation*} +A_{i, t+1}=\left(1+\pi_{i, t+1}\right) B_{i, t+1}^{m}+q_{i, t} s_{i, t+1} \tag{4.10} +\end{equation*} + + +\subsection*{4.4. Firms} +We describe here the problems of the final good firms and the intermediate good firms. Unless stated otherwise, we omit the time subscript $t$. + +Final good firms. There is one final good firm in every region $i$ that produces $Y_{i}$. Each final good is sold at $P_{i}$, which is the price aggregator in each region $i . Q_{i^{\prime}, i}$ is the relative price (real exchange rate) between final goods $i^{\prime}$ and $i$ : $Q_{i^{\prime}, i}=P_{i}^{\prime} / P_{i}$. Each final good uses a variety of intermediate inputs. Inputs are purchased not only locally but from other regions as well. Let the demand from region $i$ of input $j$ that is produced in region $i^{\prime}$ be noted $v_{i, i^{\prime}, j}$. It is purchased at price $p_{i^{\prime}, j}$. The production technology is + + +\begin{equation*} +Y_{i}=\left[\sum_{i^{\prime}=1}^{N} \gamma_{i i^{\prime}}^{1 / \epsilon} \int_{j} v_{i, i^{\prime}, j}^{(\epsilon-1) / \epsilon} \mathrm{d} j\right]^{\epsilon /(\epsilon-1)} \tag{4.11} +\end{equation*} + + +Parameter $\gamma_{i i^{\prime}}$ denotes the preference of firm $i$ for inputs from region $i^{\prime}$. We assume that $\sum_{i^{\prime}} \gamma_{i i^{\prime}}=1$. Home bias for region 1 is given by $\gamma_{11}=\alpha$ so that $\gamma_{12}=1-\alpha$. If region 1 imports $1-\alpha$, then region 2 imports $\gamma_{21}=\mu_{1} / \mu_{2} \times(1-\alpha)$, and home bias for region 2 is $\gamma_{22}=1-\left(\mu_{1} / \mu_{2}\right)(1-\alpha)$. The parameter $\epsilon$ captures the substitutability between intermediate inputs. Demand of final good firm $i$ for input $j$ located at $i^{\prime}$ is + + +\begin{equation*} +v_{i, i^{\prime}, j}=\gamma_{i i^{\prime}}\left[\frac{p_{i^{\prime}, j}}{P_{i}}\right]^{-\epsilon} Y_{i} \tag{4.12} +\end{equation*} + + +The final good firm is making zero profits (perfect competition), which allows us to write the price aggregate as + + +\begin{equation*} +P_{i}=\left[\sum_{i^{\prime}=1}^{N} \gamma_{i i^{\prime}} \int_{j} p_{i^{\prime}, j}^{1-\epsilon} \mathrm{d} j\right]^{1 /(1-\epsilon)} \tag{4.13} +\end{equation*} + + +Intermediate good firms. Each region $i$ has a continuum of intermediate goods indexed by $j$. The intermediate good $y_{i, j}$ is produced using only labour. We assume that labour cannot move across regions. Firms use a linear technology + + +\begin{equation*} +y_{i, j}=L_{i, j} \tag{4.14} +\end{equation*} + + +where $L_{i, j}$ is labour demanded by firm $j$ in region $i$. The intermediate good firm faces demand both from the local and the foreign final good firm. As mentioned, firm $j$ located in region $i^{\prime}$ faces demand by final good firm $i$ equal to $v_{i, i^{\prime}, j}$. The aggregate demand for region $i$ intermediate good firm $j$ will be + + +\begin{equation*} +y_{i, j}=\sum_{i^{\prime}} \mu_{i^{\prime}} v_{i^{\prime}, i, j} \tag{4.15} +\end{equation*} + + +Due to monopolistic competition, the intermediate good firm takes its demand into account when setting its price $p_{i, j}$. The intermediate good firm discounts the future based on the rate of return $r$. We denote $\tilde{\beta}_{i}=1 /\left(1+r_{i, t+1}\right)$. Each firm can adjust its price with probability $\lambda$. Since the intermediate good firm is solving a dynamic problem, we re-introduce the time subscript $t$ into our equations. The reset price $p^{*}$ is found by maximizing the value of firm + + +\begin{equation*} +\max _{p_{i, j, t}^{*}} \sum_{s=0}^{\infty}(1-\lambda)^{s} \frac{1}{\Pi_{h=1}^{s}\left(1+r_{t+h}\right)}\left\{p_{i, j, t+s}^{*} y_{i, j, t+s}-W_{i, t+s} L_{i, j, t+s}\right\} \tag{4.16} +\end{equation*} + + +where $W_{i, t}$ is the nominal wage. This leads to the optimal pricing equation + + +\begin{equation*} +\frac{p_{i, j, t}^{*}}{P_{i, t}}=\frac{\epsilon}{\epsilon-1} \frac{\sum_{i^{\prime}=1}^{N} \mu_{i^{\prime}} \gamma_{i^{\prime} i} Q_{i^{\prime}, i, t}^{\epsilon}\left[w_{i, t} Y_{i^{\prime}, t}+(1-\lambda) \tilde{\beta}_{i}\left(1+\pi_{i^{\prime}, t+1}\right)^{1+\epsilon} \mathcal{X}_{i^{\prime}, i, t+1}\right]}{\sum_{i^{\prime}=1}^{N} \mu_{i^{\prime}} \gamma_{i^{\prime} i} Q_{i^{\prime}, i, t}^{\epsilon}\left[Y_{i^{\prime}, t}+(1-\lambda) \tilde{\beta}_{i}\left(1+\pi_{i^{\prime}, t+1}\right)^{\epsilon} \mathcal{Z}_{i^{\prime}, t+1}\right]} \tag{4.17} +\end{equation*} + + +with + + +\begin{align*} +\mathcal{X}_{i^{\prime}, i, t} & =w_{i, t} Y_{i^{\prime}, t}+(1-\lambda) \tilde{\beta}_{i}\left(1+\pi_{i^{\prime}, t+1}\right)^{1+\epsilon} \mathcal{X}_{i^{\prime}, i, t+1} \tag{4.18}\\ +\mathcal{Z}_{i^{\prime}, i, t} & =Y_{i^{\prime}, t}+(1-\lambda) \tilde{\beta}_{i}\left(1+\pi_{i^{\prime}, t+1}\right)^{\varepsilon} \mathcal{Z}_{i^{\prime}, i, t+1} \tag{4.19} +\end{align*} + + +Finally, the real profits for intermediate firm $j$ in region $i$ are + + +\begin{equation*} +d_{i, j, t}=\frac{p_{i, j, t}}{P_{i, t}} y_{i, j, t}-w_{i, t} y_{i, j, t} \tag{4.20} +\end{equation*} + + +and the per-capita real dividends in region $i$ are $D_{i}=\int_{j} d_{i, j}$. + +\subsection*{4.5. Monetary authority} +Regions are part of a monetary union. We consider a simple Taylor rule where the monetary authority sets the nominal rate based on the aggregate inflation rate $\hat{\pi}$. In particular, + + +\begin{equation*} +R_{t}=R_{s s}+\zeta \hat{\pi}_{t} \tag{4.21} +\end{equation*} + + +The aggregate inflation rate $\hat{\pi}=\sum_{i} \mu_{i} \pi_{i, t}$ is a weighted average of the regional inflation rates. Since after 2008, the monetary policy was constrained by the lower bound, we set $\zeta=0$ in our benchmark calibration. This case captures the effect of government spending in an environment where the monetary authority is unresponsive to inflation pressures. + +\subsection*{4.6. Government} +The government buys final goods from every region. Per-capita government spending in region $i$ is denoted $G_{i}$. It finances spending using labour income taxes and dividend taxes. Labour income taxes are the sum of a lump-sum component $T$ and a proportional tax $\tau$ : + +$$ +\mathcal{T}_{t}=-T+\tau\left[w_{i t} x_{t} h_{t}+\delta\left(x_{t}\right)(1-\omega) D_{i t}\right] +$$ + +The government budget constraint is + + +\begin{equation*} +\sum_{i} \mu_{i}\left(1+\pi_{i, t+1}\right) B_{i, t+1}^{m}-\left(1+R_{t-1}\right) \sum_{i} \mu_{i} B_{i, t}^{m}=\sum_{i} \mu_{i} G_{i, t}-\sum_{i} \mu_{i} \int_{\phi_{i, t}} \mathcal{T}_{t}-\tau_{d} \omega \sum_{i} \mu_{i} D_{i t}, \tag{4.22} +\end{equation*} + + +where $B_{i, t}^{m}$ is the bond holdings of the regional mutual fund. In equilibrium, the demand for government bonds by the regional mutual funds is equal to the supply of government bonds by the government: $\sum_{i} \mu_{i} B_{i, t}^{m}=B_{t}^{g}$. Along the transition, the supply of bonds is given by the following fiscal rule: $B_{t}^{g}=B_{s s}^{g}-\sum_{i} \mu_{i}\left(q_{i, t}-q_{i, s s}\right)$. According to this fiscal rule, any decline in equity value is met with an equivalent increase in government debt. As is typical in models with sticky prices, government spending increases the nominal wages, reducing the markup and therefore the firms' dividends and the value of equity. The equity shares are implicitly held\\ +by households (together with government bonds). We neutralize the effect of movements in equity value by making the assumption that the government intervenes and injects liquidity in the economy in the form of an additional supply of government bonds. ${ }^{18}$ + +\subsection*{4.7. Regional accounts} +We describe the regional income accounts once more abstracting from time subscript $t$. Regional income is equal to the total value added by all intermediate firms in that region: $\mu_{i} \mathcal{Y}_{i}= \int_{j} \sum_{i^{\prime}} \mu_{i^{\prime}} v_{i^{\prime}, i, j} \mathrm{~d} j$. Per-capita income for every region $i$ is equal to $\mathcal{Y}_{i}=w_{i} L_{i}+D_{i}$. Per-capita final $\operatorname{good} Y_{i}$ is equal to per-capita consumption $C_{i}$ plus per-capita government spending $G_{i}$. + +\subsection*{4.8. Characterizing the equilibrium} +We derive expressions that clarify some of our equilibrium conditions. As mentioned, the total demand for intermediate firm $(i, j)$ in period $t$ is + +$$ +y_{i, j, t}=\sum_{i^{\prime}} \mu_{i^{\prime}} v_{i^{\prime}, i, j, t}=\sum_{i^{\prime}} \mu_{i^{\prime}} \gamma_{i^{\prime} i}\left[\frac{p_{i, j, t}}{P_{i^{\prime}, t}}\right]^{-\epsilon} Y_{i^{\prime}, t} +$$ + +Aggregating over $j$, we derive the total demand for intermediate inputs of region $i$ in period $t$ + + +\begin{align*} +\int_{j} y_{i, j, t}=\mu_{i} \mathcal{Y}_{i, t} & =\sum_{i^{\prime}} \mu_{i^{\prime}} \gamma_{i^{\prime} i}\left[\frac{\int_{j} p_{i, j, t}}{P_{i^{\prime}, t}}\right]^{-\epsilon} Y_{i^{\prime}, t} \tag{4.23}\\ +& =\left[\lambda\left(\frac{p_{i, j, t}^{*}}{P_{i, t}}\right)^{-\epsilon}+(1-\lambda)\left(1+\pi_{i, t}\right)^{\epsilon}\right] \cdot \sum_{i^{\prime}} \mu_{i^{\prime}} \gamma_{i^{\prime} i} Q_{i^{\prime}, i, t}^{\epsilon} Y_{i^{\prime}, t} \tag{4.24} +\end{align*} + + +Since trade linkages are a function of home bias in region 1 (denoted $\alpha$ ), we can derive the following expressions for per-capita income: + +$$ +\begin{aligned} +& \mathcal{Y}_{1, t}=\left[\lambda\left(\frac{p_{1, j, t}^{*}}{P_{1, t}}\right)^{-\epsilon}+(1-\lambda)\left(1+\pi_{1, t}\right)^{\epsilon}\right]\left[\alpha Y_{1, t}+(1-\alpha) Q_{2,1, t}^{\epsilon} Y_{2, t}\right] \\ +& \mathcal{Y}_{2, t}=\left[\lambda\left(\frac{p_{2, j, t}^{*}}{P_{2, t}}\right)^{-\epsilon}+(1-\lambda)\left(1+\pi_{2, t}\right)^{\epsilon}\right]\left[\frac{\mu_{1}}{\mu_{2}}(1-\alpha) Q_{1,2, t}^{\epsilon} Y_{1, t}+\left(1-\frac{\mu_{1}}{\mu_{2}}(1-\alpha)\right) Y_{2, t}\right] . +\end{aligned} +$$ + +The above expressions are the key equations linking the trade flows between regions. Per-capita income in region $i$ is a weighted sum of regional final goods $Y_{i^{\prime}, t} \forall i^{\prime}$. If the demand for final $\operatorname{good} Y_{i^{\prime}, t}$ increases, then $\mathcal{Y}_{i, t}$ increases depending on the strength of trade linkages $\alpha$, the relative populations $\mu_{i}$, and the relative price of final good $Q_{i^{\prime}, i, t}^{\epsilon}$. + +\subsection*{4.9. Definition of the equilibrium} +We describe the equilibrium over the transition and leave the description of the steady-state equilibrium for Supplementary Material, Appendix F. For an exogenous sequence of regional\\ +18. In Kaplan et al. (2018), the equity is part of illiquid assets. As a result, they can neutralize the effects of a countercyclical movement in equity value by assuming a profit distribution rule that guarantees an illiquid income flow that is independent of the markup. We cannot rely on a similar assumption as our model features a single asset.\\ +government spending $\left\{G_{i, t}\right\}_{i=1}^{2}$, the equilibrium over the transition is a time sequence of equilibrium variables. In particular, we are looking to solve for $\left\{C_{i, t}\right\}_{i=1}^{2},\left\{L_{i, t}\right\}_{i=1}^{2},\left\{A_{i, t+1}\right\}_{i=1}^{2}$, $\left\{B_{i, t+1}^{m}\right\}_{i=1}^{2},\left\{Y_{i, t}\right\}_{i=1}^{2},\left\{\mathcal{Y}_{i, t}\right\}_{i=1}^{2},\left\{w_{i, t}\right\}_{i=1}^{2},\left\{\pi_{i, t}\right\}_{i=1}^{2},\left\{q_{i, t}\right\}_{i=1}^{2},\left\{p_{i, j, t}^{*} / P_{i, t}\right\}_{i=1}^{2}, Q_{12, t},\left\{D_{i, t}\right\}_{i=1}^{2}, R_{t}$, $\hat{\pi}_{t}, \tau_{t}$ and $\left\{\phi_{i, t}\right\}_{i=1}^{2}$, for $t=\left\{t_{0}, \infty\right\}$ where $t_{0}$ is the time of the policy change. + +\begin{enumerate} + \item Goods market equilibrium: The demand for goods by households in region $i, C_{i, t}$, is derived by the household's problem and together with local government spending, $G_{i, t}$, give the total demand for final good $i: Y_{i, t}=C_{i, t}+G_{i, t} \forall i$. The inflation rates that clear the goods market $\left\{\pi_{i, t}\right\}_{i=1}^{2}$ are derived using the following equations: +\end{enumerate} + +$$ +\begin{aligned} +\frac{p_{i, j, t}^{*}}{P_{i, t}} & =\frac{\epsilon}{\epsilon-1} \frac{\sum_{i^{\prime}=1}^{N} \mu_{i^{\prime}} \gamma_{i^{\prime} i} Q_{i^{\prime}, i, t}^{\epsilon}\left[w_{i, t} Y_{i^{\prime}, t}+(1-\lambda) \tilde{\beta}_{i}\left(1+\pi_{i^{\prime}, t+1}\right)^{1+\epsilon} \mathcal{X}_{i^{\prime}, i, t+1}\right]}{\sum_{i^{\prime}=1}^{N} \mu_{i^{\prime}} \gamma_{i^{\prime} i} Q_{i^{\prime}, i, t}^{\epsilon}\left[Y_{i^{\prime}, t}+(1-\lambda) \tilde{\beta}_{i}\left(1+\pi_{i^{\prime}, t+1}\right)^{\epsilon} \mathcal{Z}_{i^{\prime}, t+1}\right]} \\ +1 & =\sum_{i^{\prime}} \gamma_{i i^{\prime}} Q_{i^{\prime}, i, t}^{1-\epsilon}\left[\lambda\left(\frac{p_{i^{\prime}, j, t}^{*}}{P_{i^{\prime}, t}}\right)^{1-\epsilon}+(1-\lambda)\left(1+\pi_{i^{\prime}, t}\right)^{\epsilon-1}\right] \forall i +\end{aligned} +$$ + +\begin{enumerate} + \setcounter{enumi}{1} + \item Regional income in region $i, \mu_{i} \mathcal{Y}_{i, t}$, is a weighted sum of regional final goods: +\end{enumerate} + +$$ +\mu_{i} \mathcal{Y}_{i, t}=\left[\lambda\left(\frac{p_{i, j, t}^{*}}{P_{i, t}}\right)^{-\epsilon}+(1-\lambda)\left(1+\pi_{i, t}\right)^{\epsilon}\right] \cdot \sum_{i^{\prime}} \mu_{i^{\prime}} \gamma_{i^{\prime} i} Q_{i^{\prime}, i, t}^{\epsilon} Y_{i^{\prime}, t} \forall i +$$ + +\begin{enumerate} + \setcounter{enumi}{2} + \item Labour market equilibrium: The labour supply satisfies the household's problem and the aggregate labour supply in region $i$ is $\mu_{i} \int_{\phi_{i, t}} x_{t} h_{t}$. Since we have a linear technology, the aggregate labour demand $\mu_{i} L_{i, t}$ equals aggregate income $\mu_{i} \mathcal{Y}_{i, t}$. The wage rate $w_{i, t}$ that clears the labour market in region $i$ is found using the following labour market condition: +\end{enumerate} + +$$ +\mu_{i} L_{i, t}=\mu_{i} \int_{\phi_{i, t}} x_{t} h_{t} +$$ + +\begin{enumerate} + \setcounter{enumi}{3} + \item Real exchange rate $Q_{1,2, t}=P_{1, t} / P_{2, t}$ satisfies the following equation: +\end{enumerate} + +$$ +\frac{\left(1+\pi_{1, t}\right)}{\left(1+\pi_{2, t}\right)}=\frac{P_{2, t-1}}{P_{1, t-1}} \frac{P_{1, t}}{P_{2, t}}=Q_{2,1, t-1} Q_{1,2, t} +$$ + +\begin{enumerate} + \setcounter{enumi}{4} + \item Dividends are given by +\end{enumerate} + +$$ +D_{i, t}=\left[\lambda\left(\frac{p_{i, j, t}^{*}}{P_{i, t}}\right)^{1-\epsilon}+(1-\lambda)\left(1+\pi_{i, t}\right)^{\epsilon-1}\right] \cdot \sum_{i^{\prime}} \mu_{i^{\prime}} \gamma_{i^{\prime} i} Q_{i^{\prime}, i, t}^{\epsilon} Y_{i^{\prime}, t}-w_{i, t} L_{i, t} \forall i +$$ + +\begin{enumerate} + \setcounter{enumi}{5} + \item Household savings equal the demand for government bonds and equity shares by the mutual funds +\end{enumerate} + +$$ +\sum_{i} \mu_{i} A_{i, t+1}=\sum_{i} \mu_{i}\left(1+\pi_{i, t+1}\right) B_{i, t+1}^{m}+\sum_{i} \mu_{i} q_{i, t}, +$$ + +where the total number of shares is normalized to one and the value of equity, $q_{i, t}$, is given by arbitrage equation (4.9).\\ +7. The demand for government bonds by the mutual funds equals the supply of bonds by the government: $\sum_{i} \mu_{i} B_{i, t}^{m}=B_{t}^{g}$. The supply of bonds along the transition is given by the fiscal rule: $B_{t}^{g}=B_{s s}^{g}-\sum_{i} \mu_{i}\left(q_{i, t}-q_{i, s s}\right)$.\\ +8. The tax rate $\tau$ is found by balancing the government budget constraint: + +$$ +\sum_{i} \mu_{i}\left(1+\pi_{i, t+1}\right) B_{i, t+1}^{m}-\left(1+R_{t-1}\right) \sum_{i} \mu_{i} B_{i, t}^{m}=\sum_{i} \mu_{i} G_{i, t}-\sum_{i} \mu_{i} \int_{\phi_{i, t}} \mathcal{T}_{t}-\tau_{d} \omega \sum_{i} \mu_{i} D_{i t} . +$$ + +\begin{enumerate} + \setcounter{enumi}{8} + \item The monetary policy does not respond to inflation: $R_{t}=R_{s s}$. + \item The national inflation rate is given by: $\hat{\pi}_{t}=\sum_{i=1}^{2} \mu_{i} \pi_{i, t}$. + \item The regional measures $\phi_{i, t}$ evolve based on the policy functions and the transition matrices described in the model. +\end{enumerate} + +For the steady-state equilibrium, we assume inflation is zero, and prices are symmetric within and across regions: $p_{i, j} / P_{i}=1 \forall i$ and $Q_{i i^{\prime}}=1 \forall i, i^{\prime}$. + +\subsection*{4.10. Existence and uniqueness of equilibrium} +We impose two restrictions when computing our equilibrium. ${ }^{19}$ First, in our equilibrium, we restrict attention to transition paths for which at a sufficiently long time after the fiscal stimulus is over, the inflation rate in both regions is equal to its steady-state value, i.e. $\pi_{i, t^{*}}=0$, for all regions, and the relative price is equal to its steady-state value, i.e. $Q_{12, t^{*}}=1$, where $t^{*}$ is sufficiently large. As such, equilibrium paths converge over time to the initial steady state. Since the monetary policy (i.e. the nominal interest rate) does not respond to inflation, it is possible that there are multiple equilibrium paths that lead to the original steady state. + +As a result, we additionally impose restrictions to the state space. Specifically, we focus on the minimum state variable (MSV) equilibrium which arises when the optimal choices depend on a minimal set of state variables. ${ }^{20}$ Our set of state variables is selected such that it is not possible to delete a single state variable (or a group of state variables) from agents' policy functions and continue to obtain a solution that satisfies the model's equilibrium conditions (McCallum, 1983). We could have selected extraneous state variables (e.g. sunspot shocks) whose inclusion could potentially give another solution satisfying the equilibrium conditions but would not be necessary to obtain one. Focusing on the class of MSV equilibria, the MSV solution is the unique equilibrium in linear settings (McCallum, 1983). We do not know with certainty if uniqueness generalizes to nonlinear dynamic systems as in our model. ${ }^{21}$ + +\section*{5. QUANTITATIVE ANALYSIS} +We use the model to translate the local fiscal multiplier to an aggregate fiscal multiplier. First, we describe our calibration and steady-state results. Then we consider the main quantitative experiment: temporary regional government spending shocks.\\ +19. The computational algorithm to solve for the transitional dynamics is presented in Supplementary Material, Appendix I.\\ +20. One motivation for restricting attention to MSV equilibria appears in Angeletos and Lian (2021). They show that an infinitesimally small memory loss on behalf of future agents renders all but one equilibrium, the MSV equilibrium, explosive. Note, however, that Angeletos and Lian (2021) study linear models.\\ +21. Hagedorn (2017) and Hagedorn et al. (2017) offer an alternative possibility to avoid multiple equilibria. In their framework, uniqueness of equilibrium is guaranteed by a combination of incomplete markets (and thus, precautionary savings) and nominal bond targeting. This result does not apply to our case where we make the more standard assumption that the government targets real debt. + +\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 7\\ +Benchmark parameters} +\begin{tabular}{|l|l|l|l|} +\hline +Parameter & Notation & Value & Target/source \\ +\hline +Mean discount factor & $\bar{\beta}$ & 0.985 & Annual real rate $=4 \%$ \\ +\hline +Dispersion in discount factor & $\epsilon_{\beta}$ & 0.005 & \%Households with $a / y<1 \%$ \\ +\hline +Labour supply elasticity & $1 / \theta$ & 1.0 & Beraja et al. (2019) \\ +\hline +Disutility of labour & $\psi$ & 5.8 & Hours worked $=42 \%$ \\ +\hline +Persistence of $x$ & $\rho$ & 0.955 & Persistence of log-wages $=0.92$ \\ +\hline +Variance of innovation to $x$ & $\sigma_{\eta}^{2}$ & 1.5\% & Variance of log-wages $=0.04$ \\ +\hline +Per-capita gov. spending & G & 0.10 & $G / Y=20 \%$ \\ +\hline +Dividend allocation & $\omega$ & 0.32 & NIPA tables \\ +\hline +Elasticity of substitution & $\epsilon$ & 6 & Christiano et al. (2011) \\ +\hline +Price reset probability & $\lambda$ & 0.15 & McKay et al. (2016) \\ +\hline +Taylor rule coefficient & $\zeta$ & 0.0 & - \\ +\hline +Stock of liquid assets & $B^{g}$ & $1.2 \times$ annual income & SCFs \\ +\hline +Dividend tax & $\tau_{d}$ & 0.25 & Gourio and Miao (2010) \\ +\hline +Lump-sum transfer & $T$ & 0.03 & $T / Y=6 \%$ \\ +\hline +Size of region 1 & $\mu_{1}$ & 3.1\% & Relative county population \\ +\hline +Home bias & $\alpha$ & 0.58 & CFS \\ +\hline +\end{tabular} +\end{center} +\end{table} + +\subsection*{5.1. Calibration} +Table 7 summarizes our parameter choices. The model period is a quarter. The average discount factor $\bar{\beta}$ is set to match an annual steady-state real interest rate equal to $4 \%$. The utility from leisure parameter $\psi$ is set so that on average households work $42 \%$ of their time endowment. ${ }^{22}$ Parameter $\theta$ that governs the Frisch elasticity of labour supply is set to 1 based on Beraja et al. (2019). This value reflects a combined labour supply response at the intensive and extensive margin. + +The productivity process is calibrated based on the estimates of Floden and Linde (2001). Using our model, we simulate labour income paths and then annualize the simulated data to match a persistence of $\rho=0.92$ and $\sigma_{\eta}^{2}=0.04$. We set steady-state government spending $G$ to match a government spending to income ratio equal to $20 \%$. The lump-sum transfer $T$ is equal to $6 \%$ of annual income (Kaplan et al., 2018). We set the elasticity of substitution $\epsilon=6$ based on Christiano et al. (2011). The probability of changing price $\lambda=0.15$ is based on McKay et al. (2016). ${ }^{23}$ + +As Kaplan and Violante (2014) have shown, households use primarily liquid assets to adjust their consumption. Moreover, Carroll et al. (2017) have shown that a model that matches the degree of inequality in liquid financial assets generates marginal propensities to consume closer to the empirical estimates. Hence, we calibrate the debt-to-income ratio to match the empirical ratio of liquid assets to income and the discount factor dispersion, represented by the parameter $\epsilon_{\beta}$, to match the fraction of households whose liquid assets are less than $1 \%$ of their annual income. We use data from the survey of consumer finances (SCFs) for period 1998-2007. We define liquid assets following Kaplan and Violante (2014). In particular, liquid financial assets are cash, checking accounts, savings accounts, money market accounts, and stocks net of credit card debt. There are no data in the SCF on households' cash holdings. As a result, we increase\\ +22. In the panel study of income dynamics, prime-age, full-time employed males work around $2,200 \mathrm{~h}$ per year. We normalize this value by a time endowment of $5,200 \mathrm{~h}$ per year.\\ +23. This is on the lower end of the empirical estimates, but it is supported by the absence of inflation pressures during and in the aftermath of the Recovery Act episode.\\ +liquid asset holdings by a factor of 1.04 (see the appendix in Kaplan and Violante, 2014). In 2009 prices, the average (median) household owns $\$ 94,443(\$ 3,149)$ in liquid assets. Average (median) household income is $\$ 78,500(\$ 46,564)$. As a result, we target an annual debt-toincome ratio of 1.20 . We also find that the fraction of households whose liquid assets are less than $1 \%$ of their annual income is $29 \%$. + +Based on the national income accounts, we find that for the period 2007-08, the undistributed corporate profits were, on average, $\$ 394$ billion, while dividend income was $\$ 809$ billion. Thus, undistributed corporate profits as a share of total dividends (both undistributed and distributed as income) is around $32 \%$. Therefore, we use a value of $\omega=0.32$, which is slightly lower than the value of 0.33 used by Kaplan et al. (2018). The dividend tax equals 0.25 based on Gourio and Miao (2010). + +There are two regions in the model: one small region and the rest of the economy. Consistent with our empirical exercise, we interpret region 1 as a county. According to our analysis (presented in Supplementary Material, Appendix E), regional spillovers stabilize for geographical regions larger than 1,000 miles, which roughly corresponds to the size of a U.S. Census region. ${ }^{24}$ Thus, we set $\mu_{1}=0.031$ which represents the average size of a county relative to the Census region (weighted by county-level income in 2010). + +The second regional parameter to calibrate is the preference of the final good firm for home versus foreign inputs, $\alpha$. We calibrate home bias using direct evidence on shipments of goods from the CFS for 2012. As mentioned, the data include information on commodities shipped, their value, weight, and the origin and destination of the shipments across U.S. states. For every state, we compute the total value of shipments that originated and shipped inside the state, as well as the total value of shipments that originated in the state but were exported to other states. We find that on average $42 \%$ of shipments of goods stay within state borders. + +Next, we note that a large fraction of spending is on services. According to the 2010 National Income and Product Accounts (NIPA) tables, services absorb $68 \%$ of total spending. Services are traditionally considered non-tradable, but a substantial fraction can be delivered over a distance (e.g. financial or legal services). Gervais and Jensen (2019) document that the U.S. was exporting around $30 \%$ of its services in 2007. To account for both goods and services, we estimate home bias as $(1-0.68) \times 0.42+ 0.68 \times 0.70=0.61$. + +To calibrate a county-level home bias, we use the state-level home bias and the relative populations of these two geographical areas. Let $\mathcal{M}$ denote the size of the state that includes the county ( $\mu \leq \mathcal{M}$ ). Let $\mathcal{S}$ denote the home bias of the state, which we found to be 0.61 and is at least as large as the home bias of the county, so that $\alpha \leq \mathcal{S}$. If demand increases by $\$ 1$ in a random county that is part of the state, then the county keeps $\alpha$ and exports $1-\alpha$. The exports will be absorbed by the other counties of the same state with probability $(\mu /(1-\mu))((\mathcal{M}-\mu) / \mu)$. The first term $\mu /(1-\mu)$ is the probability a random county anywhere in the whole economy absorbs the exports, while $(\mathcal{M}-\mu) / \mu$ is the relative size of the state area, excluding the original county that received the dollar. As a result, we can write the state-level home bias using the formula + +$$ +\mathcal{S}=\alpha+(1-\alpha) * \frac{\mu}{1-\mu} \frac{\mathcal{M}-\mu}{\mu} +$$ + +Based on population measures, we calculate the relative size of the state as $\mathcal{M}=0.10$. This implies a county-level home bias equal to $\alpha=0.58$.\\ +24. The U.S. Census Bureau considers four regions: the Northeast, the Midwest, the South, and the West. + +\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 8\\ +Statistics over liquid assets and MPC} +\begin{tabular}{|l|l|l|} +\hline +Statistic & SCF (1998-2007) & Model \\ +\hline +Households with $a / y<1 \%$ & 0.29 & 0.30 \\ +\hline +Liquid assets/income & 1.20 & 1.20 \\ +\hline +Liquid assets Gini & 0.93 & 0.75 \\ +\hline +Median MPC & & 0.11 \\ +\hline +Average MPC & & 0.37 \\ +\hline +\end{tabular} +\end{center} +\end{table} + +Notes: The table presents summary statistics regarding wealth and the MPC. All statistics are reported at an annual frequency. + +\subsection*{5.2. Steady-state results} +In Table 8, we compare the model to data with respect to the liquid asset distribution. We also report the median and the average MPC. Our model is calibrated to capture the average liquid asset-to-income ratio as well as the fraction of households with asset-to-income ratios less than $1 \%$. The wealth Gini is 0.75 in our model, which is lower than the empirical value of 0.93 but somewhat higher than in typical Aiyagari models. Table 8 also reports the median and the average MPC. We transform the quarterly into an annual MPC using the formula $1-(1-\text { quarterly MPC })^{4}$. The annual average MPC in our model is 0.37 , which corresponds to a quarterly MPC of 0.11 . + +There has been ample recent evidence on the magnitude of consumption responses to unexpected income transfers. Most studies find annual estimates of MPC between 0.2 and 0.6 (Carroll et al., 2017). Our MPC estimate is within this range. Sahm et al. (2010) analyse survey responses and find that roughly one-third of the 2008 economic stimulus rebate income was spent and that the spending was concentrated in the few months after the receipt. ${ }^{25}$ Also analysing the tax rebates of the 2008 economic stimulus, Parker et al. (2013) find that during the first three months following payment, households spend between 12 and 30 cents of every dollar received on nondurable goods. Once durable spending is taken into account, the authors find a MPC of between 50 and 90 cents per dollar. Our quarterly MPC estimate is at the lower bound of their estimates regarding non-durable spending. Jappelli and Pistaferri (2014) use a survey that asks how much people would consume or save were they unexpectedly to receive a transfer equal to their monthly income. They find substantial heterogeneity, with the average MPC being around $48 \%$. Similar to the evidence provided by Jappelli and Pistaferri (2014), in our model, households with the lowest net worth exhibit the highest MPCs. + +\subsection*{5.3. The government spending shock and transition dynamics} +We analyse the effect of a government spending shock on consumer spending. Figure 4 shows average county-level Recovery Act spending between 2009 and 2012. ${ }^{26}$ We approximate the process using an AR(2) for the government spending shock: $G_{t}=\left(1-\rho_{1}-\rho_{2}\right) G_{s s}+\rho_{1} G_{t-1}+ \rho_{2} G_{t-2}$. Parameters $\rho_{1}, \rho_{2}$ are chosen to match the county-level spending in the data. We pick\\ +25. Their estimate of one-third is likely biased downward as the propensity to consume is bounded at one when they translate the "mostly spend" responses to an MPC. Sahm et al. (2012) document that the way the stimulus is delivered (reduction in tax withholdings versus one-time payments) matters for how much households spend.\\ +26. We do not have data for projects in 2009, so we use numbers from Uhlig (2010). However, this does not affect our calculations since these projects show up in cumulative spending of the following years, provided they did not finish before the first quarter of 2010. + +\begin{figure}[h] +\begin{center} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-26_720_852_215_501} +\captionsetup{labelformat=empty} +\caption{Figure 4\\ +Recovery Act spending: data versus model\\ +Notes: Average county-level Recovery Act spending (in millions of dollars), by quarter (left axis). Model simulation of government spending shock for region 1 (right axis).} +\end{center} +\end{figure} + +the impact shock in region 1 so that the peak of the simulated path is $1 \%$ higher than the steady state. We calibrate the shock for region 2 to be $36 \%$ lower than the shock in region 1 since percapita spending at the 25 th percentile of the distribution of ARRA funds was around $36 \%$ lower than at the 75th percentile. The shock is assumed to be a one-time unexpected innovation, and households can perfectly foresee the future evolution of prices and quantities. + +We plot the impulse response functions for macroeconomic aggregates in Figure 5. All quantities are expressed in per capita terms. The increase in government spending $G_{1}$ increases the demand for final good $Y_{1}$. As a result, local inflation $\pi_{1}$ increases (upper right panel). To accommodate the extra demand, intermediate good firms in region 1 demand more labour, which increases the local real wage $w_{1}$ (middle left panel). The percentage increase in labour income turns out to be higher than the percentage increase in total income so that dividends decrease (middle right panel). + +Per-capita government spending in region 2 is less than per-capita government spending in region 1 . However, due to trade linkages, a fraction of the stimulus spreads to region 2 in the form of higher demand for intermediate inputs. As a result, inflation in both regions responds almost equally. ${ }^{27}$ Wages $w_{2}$ also increase in region 2 , both due to the local fiscal stimulus and the increased demand for local inputs coming from region 1. + +Higher inflation in region 1 relative to region 2 implies an initial small appreciation of the real exchange rate $Q_{i^{\prime} i}=P_{i}^{\prime} / P_{i}$. The appreciation induces an expenditure switching effect. The final good firm in region 1 substitutes local with cheaper foreign intermediate inputs. This tends to make the comovement of economic aggregates between the regions even higher. More- over, federal taxes adjust to keep the budget balanced. However, due to higher inflation, which decreases some of the government's debt service cost, the need to adjust taxes is relatively small. + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{26} + \item Both the aggregate and the relative response of inflation are small due to the relatively high degree of price stickiness. We discuss the empirical validity of our calibration in Section 5.4. +\end{enumerate} +}\begin{figure}[h] +\begin{center} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-27_1535_1270_213_295} +\captionsetup{labelformat=empty} +\caption{Figure 5\\ +Impulse responses to a government spending shock\\ +Notes: Impulse response functions for a temporary government spending shock. All units are in per-capita terms and are expressed as percentage deviations from their steady state. For the inflation rate, we report the deviation from the steady state in levels.} +\end{center} +\end{figure} + +This redistribution of resources from the private to the public sector hurts net savers, namely, wealthy, low-MPC households. In contrast, the small adjustment in taxes affects a broader group of consumers including low-income, high-MPC households. + +Both regions increase consumer spending as a response to fiscal stimulus (lower left panel). Region 1 consumes more than region 2 not only on impact but throughout the transition. This happens because region 1 saves some of its higher income during the fiscal stimulus, while region 2 deaccumulates asset holdings (lower right panel). + +\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 9\\ +Consumption multipliers: data versus model} +\begin{tabular}{|l|l|l|l|} +\hline +Horizon & $t=8$ & $t=16$ & $t=32$ \\ +\hline +\multicolumn{4}{|l|}{Data} \\ +\hline +Local & - & 0.29 & - \\ +\hline +\multicolumn{4}{|l|}{Model} \\ +\hline +Local & 0.15 & 0.20 & 0.26 \\ +\hline +Aggregate & 0.41 & 0.41 & 0.47 \\ +\hline +\end{tabular} +\end{center} +\end{table} + +Notes: The empirical target of 0.29 is the consumption multiplier for spending on non-durable goods and services (Table 5). + +\begin{figure}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 10\\ +Change in consumption: decomposition} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-28_658_1330_714_261} +\end{center} +\end{figure} + +Notes: Consumption change and multipliers due to wage, dividends, inflation, and taxes. Each case sets a variable to its equilibrium path and all others to their steady-state value. The table reports four-year consumption multipliers. Equilibrium paths are shown only for region 1. + +We compute local and aggregate consumption multipliers using the model-generated impulse responses. The local consumption multiplier is computed from the model-generated regional data using the same specification as in our empirical analysis (see equation (3.2)). The aggregate multiplier is computed as $\sum_{i} \mu_{i} \Delta C_{i, t} / \sum_{i} \mu_{i} \Delta G_{i, t}$, where $\Delta C_{i, t}$ and $\Delta G_{i, t}$ denote the cumulative change of consumption and government spending, respectively, in region $i$ and in year $t$, relative to the steady state. + +Table 9 presents our main two findings. First, the model generates a positive local multiplier reasonably close to the empirical target. Second, we find an aggregate fiscal multiplier equal to 0.41. + +Table 10 decomposes the change in consumer spending due to wages, dividends, inflation, and taxes. In particular, we set a variable equal to its equilibrium path and assume that the other variables remain constant at their steady-state values. This generates the marginal effect of a variable on total consumer spending. The left panel plots the consumer spending path for every case as well as when all effects are considered (Benchmark). The table reports the fouryear consumption multiplier in each case as well as the total effect. The total effect does not necessarily equal the sum of the individual effects due to interaction effects. We consider only region 1 , but the effects for region 2 are qualitatively similar. + +As mentioned, wages increase along the transition path as a response to higher demand for labour. Higher labour income affects mainly low wealth, labour-income-dependent households who have high MPCs and increase substantially their spending. If only wages had changed, the local multiplier would be 0.28 while the aggregate would be 0.48 . On the other hand, the decrease in dividends hurts mainly low-MPC households who are less responsive. If only dividends had changed, the local multiplier would be -0.05 while the aggregate would be -0.06 . The combined effect of the two yields an aggregate multiplier of 0.42 . + +If only inflation had changed, the local multiplier would be -0.02 and the aggregate multiplier -0.08 . The contribution of inflation to consumer spending is quantitatively small relative to the contribution of wages. ${ }^{28}$ + +If only tax rates had changed, the local multiplier would be zero since taxes occur at the federal level. The aggregate multiplier is equal to 0.05 . In the first years of the fiscal stimulus, tax rates actually decrease slightly. The reason is that higher inflation decreases the debt service cost of the government. + +Our heterogeneous agents, incomplete markets model generates positive consumption responses both at the local and the aggregate levels. In Section 6.1, we show that an incomplete markets, representative agent, new Keynesian (RA-NK) model also generates positive local and aggregate multipliers, albeit much smaller than our Benchmark. In contrast, in models with complete markets, the local consumption multiplier is negative (see, for example, Nakamura and Steinsson, 2014; Farhi and Werning, 2016; Chodorow-Reich, 2019). In addition, we show in Section 5.6 that the positive aggregate consumption multiplier is related to the weak response of monetary policy to fiscal stimulus. + +\subsection*{5.4. Empirical evidence on labour income and inflation} +The model generates a strong positive local effect of government spending on labour income and a moderate effect on inflation. It is informative to evaluate empirically the effect of the fiscal stimulus on these two variables. We collect information on county-level labour income from the Quarterly Census of Employment and Wages (QCEW). We collect information for inflation from the Bureau of Labour Statistics (BLS). We have information on price indices for the period 2008-14 for 382 Metropolitan Statistical Areas. + +The Recovery Act had a positive effect on county-level labour income (left panel; Figure 6 and Table 11). In contrast, there is no effect of government spending on inflation (right panel; Figure 6 and Table 11). Our model is consistent with these patterns. The local effect of government spending on inflation is nearly zero as both regions increase inflation by almost the same amount (Figure 5). This result arises due to our relatively high degree of price stickiness. Moreover, the local multiplier associated with labour income is positive, consistent with the empirical evidence. + +\subsection*{5.5. The role of trade linkages} +Figure 7 shows the local and the aggregate consumption multiplier as we vary the degree of home bias $\alpha$ and keep all other parameters same as in the benchmark model. Consumption multipliers are reported at a four-year horizon. In our calibration, we set home bias equal to 0.58 using + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{27} + \item We are not the first to stress the relative stronger effect of wages and the relative weaker effect of inflation on consumer spending. See, for example, the analysis in Kaplan et al. (2018). +\end{enumerate} +}\begin{figure}[h] +\begin{center} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-30_493_1266_215_291} +\captionsetup{labelformat=empty} +\caption{Figure 6\\ +Government spending (2009-12) and percentage change in labour income and inflation (2008-12), by counties Notes: Scatter plots between government spending (Recovery Act, 2009-12) and percentage change in labour income (left panel) and inflation (right panel), between 2008 and 12, by counties. Information on labour income and inflation is collected from the QCEW and the BLS, respectively.} +\end{center} +\end{figure} + +\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 11\\ +Responses of labour income and inflation to government spending (2008-12)} +\begin{tabular}{|l|l|l|l|l|} +\hline +\multirow[b]{2}{*}{Variable data source} & \multicolumn{2}{|c|}{QCEW} & \multicolumn{2}{|c|}{BLS} \\ +\hline + & OLS & IV & OLS & IV \\ +\hline +Government spending & 1.33*** (0.34) & 0.81* (0.41) & -0.000 (0.001) & -0.0002 (0.002) \\ +\hline + & & & & \\ +\hline +Partial $F$ stat. & - & 78.6 & - & 166.5 \\ +\hline +County controls/state fixed effects & Yes & Yes & Yes & Yes \\ +\hline +\# of counties & 2,916 & 2,916 & 1,116 & 1,116 \\ +\hline +\end{tabular} +\end{center} +\end{table} + +Notes: The first two columns show estimates of a regression of percentage change in labour income on cumulative government spending at the county level during the period 2008-12. The last two columns show estimates of a regression of percentage point change in inflation on log-cumulative government spending at the county level during the period 2008-12. We show results for our OLS and IV specification and the standard errors in parentheses. One, two, and three stars denote significance at the $10 \%, 5 \%$, and $1 \%$ levels, respectively.\\ +information on shipments of goods from the CFS (vertical line). This corresponds to a local consumption multiplier equal to 0.20 and an aggregate consumption multiplier equal to 0.41 . + +The local consumption multiplier is zero when $\alpha=\mu_{1}$. When home bias increases, trade flows between the two regions decline and region 1 keeps more of the local fiscal stimulus. As a result, consumption in region 1 increases more relative to consumption in region 2 . Thus, our model is consistent with the empirical evidence presented in Section 3.4: lower home bias (stronger trade linkages) decreases the local consumption multiplier. The aggregate consumption multiplier is largely unaffected by the strength of trade linkages. Since the two regions are (percapita) symmetric, the final division of government spending does not matter for the aggregate consumption response. ${ }^{29}$\\ +29. When $\alpha$ is closer to one, the increase in government spending increases substantially demand for goods and inflation in region 1 and generates expected deflation going forward. Deflation increases the real interest rate, inducing consumers to save, and therefore depresses consumption. This explains why the local consumption multiplier decreases when home bias approaches one. + +\begin{figure}[h] +\begin{center} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-31_710_856_208_503} +\captionsetup{labelformat=empty} +\caption{Figure 7\\ +Consumption multipliers and trade linkages (model)\\ +Notes: We vary parameter $\alpha$ which captures the degree of home bias for region 1 . The benchmark calibration is $\alpha=0.58$ (vertical line). We show the local and the aggregate consumption multiplier for a four-year horizon.} +\end{center} +\end{figure} + +\subsection*{5.6. The role of monetary policy} +We analyse how monetary policy affects the response of consumption to fiscal stimulus. The nominal interest rate is given by a Taylor rule: $R_{t}=R_{s s}+\zeta \hat{\pi}_{t}$. For our benchmark parametrization, we have $\zeta=0$, which corresponds to a monetary policy that is unresponsive to inflationary pressures, a case resembling the ZLB episode. Figure 8 shows the local and aggregate four-year consumption multiplier when we vary the Taylor rule coefficient $\zeta$ and keep all other parameters as in the benchmark parametrization. + +The aggregate multiplier decreases gradually as we increase the responsiveness of the monetary authority to aggregate inflation. Consumer spending drops for two reasons. First, the increase in the nominal rate increases the real interest rate, depressing consumer spending. This is true for both regions as there is a currency union. Second, the increase in the nominal rate increases the government debt service cost. As a result, to balance the budget, the government increases taxes. The combined effect of higher real interest rates and higher taxes decreases consumer spending. + +In contrast, the local consumption multiplier is largely unaffected by the responsiveness of monetary policy. This exercise confirms the intuition of the literature claiming that first, monetary authority is critical for the value of the aggregate fiscal multiplier (Christiano et al., 2011), and second, monetary policy does not affect the local multiplier so that local estimates are an upper bound for the multiplier during times of conventional monetary policy (see, for example, Chodorow-Reich, 2019). + +\subsection*{5.7. Using the local multiplier to inform the aggregate multiplier} +Our model maps the empirical evidence on the local multiplier to an estimate for the aggregate multiplier. In this section, we show that when the model is also informed by the local multiplier, + +\begin{figure}[h] +\begin{center} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-32_686_850_215_501} +\captionsetup{labelformat=empty} +\caption{Figure 8\\ +Consumption multipliers and monetary policy\\ +Notes: The Taylor rule is given by $R_{t}=R_{s s}+\zeta \hat{\pi}_{t}$. In Benchmark, we have $\zeta=0$. We vary parameter $\zeta$ and report the four-year local and aggregate consumption multiplier.} +\end{center} +\end{figure} + +it delivers a tighter range of estimates for the aggregate multiplier relative to a model that is only informed by the MPC. + +Specifically, for selected model parameters, we change the parameter value to a plausible alternative (one parameter at a time) and report the average MPC, the local multiplier, and the aggregate multiplier. Figure 9 shows the model's multipliers and the MPC for three different values of each of the following parameters-the dispersion of the discount factor, dividend tax, elasticity of substitution, dividend allocation, lump-sum transfer, and duration of the government spending shock. + +First, the figure shows that the local and the aggregate multiplier vary in a systematic way. For the most part, larger values of the local multiplier are associated with larger values of the aggregate multiplier. Hence, the local multiplier is a useful predictor of the aggregate multiplier. + +Second, and more importantly, the local multiplier is a useful statistic even if we take into account the value of the MPC. To demonstrate this, Figure 10 shows the model's MPC, local, and aggregate multipliers from Figure 9 in one scatterplot. Each dot represents a combination of the MPC and the local multiplier (with the MPC on the $x$-axis and the local multiplier on the $y$-axis), with the value of the aggregate multiplier listed next to the dot. The values of the MPC between 0.35 and 0.45 are considered within the range of reasonable empirical estimates. As can be seen from the figure, for this range, the aggregate multiplier varies substantially, from 0.29 to 0.56 . This demonstrates that the MPC is not the only factor influencing the aggregate multiplier. To pin down the value of the aggregate multiplier, we can use the local multiplier. Even conditional on MPC, the local and the aggregate multiplier vary in a systematic (positive) way. A value of the local multiplier equal to or above 0.20 -which is in line with our empirical estimates-narrows the range of the aggregate multiplier to $0.41-0.56$. Thus, the local multiplier is informative about the aggregate multiplier beyond the estimates of the MPC. + +\begin{figure}[h] +\begin{center} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-33_654_1277_211_291} +\captionsetup{labelformat=empty} +\caption{Figure 9\\ +Sensitivity analysis: MPC, local, and aggregate multiplier} +\end{center} +\end{figure} + +Notes: We vary a parameter away from its benchmark value and explore how the MPCs and the multipliers respond. The vertical dashed line shows the benchmark value for the parameter. For the duration of government spending case, government spending equals the initial benchmark amount for a given number of quarters and then is set to zero. We do not recalibrate the other parameters to hit the benchmark targets. + +\begin{figure}[h] +\begin{center} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-33_739_1059_1242_400} +\captionsetup{labelformat=empty} +\caption{Figure 10\\ +MPC, local, and aggregate multiplier under different specifications} +\end{center} +\end{figure} + +Notes: The figure shows a scatter of the MPC and the local multiplier under different specifications: (a) discount factor dispersion, (b) dividend tax, (c) elasticity of substitution, (d) dividend allocation, (e) lump-sum transfer, and (f) duration of government spending. We denote the high parameter values of each specification with a prime. Next to each specification we report the value of the aggregate multiplier. + +\section*{6. ALTERNATIVE MODELS AND SPECIFICATIONS} +We test how sensitive our main results are to alternative models and specifications. First, we consider an economy with no within-region heterogeneity. This is equivalent to a RA-NK model with two regions. Second, we analyse alternative fiscal regimes such as taxation at the local instead of the federal level as well as deficit-financed spending. Third, we consider a utility specification that depends on disutility of hours. Fourth, we analyse the implications of a Benabou-type tax schedule. Fifth, we analyse an economy with higher wealth than the benchmark economy. Sixth, we consider a liquidity trap experiment. Finally, we compute a "normal times" fiscal multiplier. In all of our experiments, upon modifying the model along one of these dimensions, we recalibrate the model to match the benchmark targets. + +\subsection*{6.1. Heterogeneous agents new Keynesian versus RA-NK model} +Our benchmark model combines a regional framework with a heterogeneous agents model. A natural question is what would the local and aggregate multiplier be without heterogeneity within a region? To address this question, we shut down idiosyncratic shocks and discount factor heterogeneity. We assume that there is a single, representative household which receives the average productivity shock (normalized to one) and that this shock persists in all time periods. Hence, in this model, the within-region distribution of labour income, assets, and discount rates, $\phi_{i}$, is degenerate. In addition, dividends are collected directly by the household. We call this economy a RA-NK. Note, however, that regions are still different across the transition because they receive different amounts of government spending. + +For a steady-state equilibrium with positive asset holdings to exist, we have to assume that $\beta(1+R)=1$. We write the problem of the representative household in region $i$ : + + +\begin{align*} +V_{i, t}\left(a_{t}\right)= & \max _{c_{t}, a_{t+1}, h_{t}}\left\{\frac{c_{t}^{1-\sigma}}{1-\sigma}+\psi \frac{\left(1-h_{t}\right)^{1-\theta}}{1-\theta}+\beta V_{i, t+1}\left(a_{t+1}\right)\right\} \tag{6.1}\\ +\text { s.t. } & c_{t}+\left(1+\pi_{i, t+1}\right) a_{t+1}=w_{i, t} h_{t}-\mathcal{T}+\left(1+R_{t-1}+\chi\right) a_{t}+\left(1-\tau_{d}\right) D_{i, t} \tag{6.2}\\ +& a_{t+1} \geq 0 \tag{6.3} +\end{align*} + + +A new aspect of this budget constraint is that we have introduced the term $\chi$. Here, $\chi$ is a function given by + +$$ +\chi=\Delta\left(a_{t+1}-a_{s s}\right) +$$ + +Similar types of debt rules are common in small open economy models and help induce stationarity. A negative $\Delta$ means that the savings interest rate is lower when agents save more than the steady-state asset holdings and vice versa. ${ }^{30}$ Moreover, the assumption of a borrowing constraint is irrelevant as the representative household never holds a negative net worth. Table 12 compares the steady state between our Benchmark and the RA-NK economy. The RA-NK model features a substantially lower MPC compared to our Benchmark. The average MPC (at an annual frequency) is 0.05 , while in our benchmark economy it is 0.37 . + +Figure 11 plots the consumption impulse response functions in our Benchmark (left panel) and the RA-NK model (right panel). In the RA-NK model, consumer spending responds less to government spending as the average MPC is lower. Both the local and the aggregate fiscal + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{29} + \item We set $\Delta=-0.5 \%$ to match the percentage change of asset holdings relative to the steady state between RA-NK and Benchmark. +\end{enumerate} +}\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 12\\ +Steady state: Benchmark versus RA-NK} +\begin{tabular}{|l|l|l|} +\hline + & Benchmark & RA-NK \\ +\hline +Liquid assets/income & 1.20 & 1.20 \\ +\hline +Liquid assets Gini & 0.75 & 0.00 \\ +\hline +Median MPC & 0.11 & 0.05 \\ +\hline +Average MPC & 0.37 & 0.05 \\ +\hline +\end{tabular} +\end{center} +\end{table} + +Notes: Selected steady-state statistics in the benchmark model and an economy with a representative agent in each region (RA-NK). The MPC is reported at an annual frequency. + +\begin{figure}[h] +\begin{center} + \includegraphics[alt={},max width=\textwidth]{f7456475-25f8-44eb-bcd7-6c03a4b15006-35_504_1275_595_293} +\captionsetup{labelformat=empty} +\caption{Figure 11\\ +Consumption responses to a government spending shock: Benchmark versus RA-NK\\ +Notes: Impulse response functions for consumption in the Benchmark case and RA-NK model. In RA-NK, there is no heterogeneity within regions. All units are expressed in percentage deviations from their steady state.} +\end{center} +\end{figure} + +\begin{table}[h] +\begin{center} +\captionsetup{labelformat=empty} +\caption{TABLE 13\\ +Consumption decomposition: RA-NK versus Benchmark} +\begin{tabular}{|l|l|l|l|l|} +\hline +\multirow[b]{2}{*}{Consumption multiplier} & \multicolumn{2}{|c|}{RA-NK} & \multicolumn{2}{|c|}{Benchmark} \\ +\hline + & Local & Aggregate & Local & Aggregate \\ +\hline +Due to wages & 0.13 & 0.17 & 0.28 & 0.48 \\ +\hline +Due to dividends & -0.03 & -0.04 & -0.05 & -0.06 \\ +\hline +Due to inflation & -0.01 & -0.04 & -0.02 & -0.08 \\ +\hline +Due to taxes & 0.00 & -0.01 & 0.00 & 0.05 \\ +\hline +Total & 0.09 & 0.06 & 0.20 & 0.41 \\ +\hline +\end{tabular} +\end{center} +\end{table} + +Notes: Multiplier decomposition due to wages, dividends, inflation, and taxes in the benchmark model and an economy with a representative agent in each region (RA-NK).\\ +multiplier are lower relative to our Benchmark. In particular, in the RA-NK model, the local multiplier is equal to 0.09 , and the aggregate is equal to 0.06 . + +The difference across model specifications is related to the response of consumer spending due to the change in wages (Table 13). If only wages had changed in our Benchmark, the local multiplier would be 0.28 , and the aggregate multiplier would be 0.48 , whereas in the RA-NK, the effect decreases to 0.13 and 0.17 , respectively. Consumer spending decreases more in our Benchmark due to dividends compared to the RA-NK, but the difference is not enough to counteract the large differential response in consumption due to wages. Inflation affects consumer spending in both economies in broadly the same way. Finally, consumer spending increases due to taxes in the Benchmark while it slightly decreases in the RA-NK. However, overall, the effect of taxes seems relatively small. + +In sum, the large difference between the Benchmark and the RA-NK multipliers come from the differential response of consumer spending to increases in labour income. In our Benchmark, the average MPC is 0.37 while in the RA-NK it is 0.05 . With a higher average MPC, the increase in labour income generates a substantial consumption response. This results in larger consumption multipliers both at the local and the aggregate levels. + +An intermediate case between the Benchmark and the RA-NK model is a model with idiosyncratic income shocks but no discount factor heterogeneity. In this model, the average annual MPC is 0.30 . The resulting local consumption multiplier is 0.13 , and the aggregate consumption multiplier is 0.19 . Thus, our empirical evidence on the local consumption multiplier favours a new Keynesian model with rich heterogeneity (in both labour productivities and discount factors) over a model with only income risk. This is especially true compared to a model with a representative agent. + +\subsection*{6.2. Alternative specifications} +Alternative fiscal rules. In the Benchmark model, taxation occurs at the federal level. Here, we assume that regions pay taxes proportional to the stimulus injected in the region. In particular, since region 2 receives $36 \%$ of the spending allocated in region 1 , it pays almost three times less the taxes set in region 1. Higher initial inflation decreases the government debt service cost and decreases the tax rate for the first few years following the shock. As a result, region 1 benefits more when taxes are local than when taxes are federal and the local multiplier increases to 0.26 . The aggregate multiplier is not affected and is equal to 0.41 . Next, we allow for the government to finance all of the spending using deficit financing. In particular, the government issues (and rolls over) debt up to year $T$ and starts imposing taxes for $t>T$ in order to bring the debt equal to its steady-state value. We consider $T=\{1,4,10\}$. The local multiplier is $0.20,0.12$, and 0.16 while the aggregate consumption multiplier is $0.35,0.41$, and 0.74 , respectively. The aggregate multiplier is higher when spending is tax financed than when it is deficit financed for a short horizon (less than four years). As mentioned, higher initial inflation decreases the government debt service cost and decreases the tax rate for the first couple of years. As a result, allowing tax to adjust generates higher multipliers. Since this effect lasts only for the first couple of years, deficit financing for ten years ahead generates larger consumption multipliers. + +Preferences with disutility of labour. In the benchmark utility specification, the labour supply elasticity depends jointly on parameter $\theta$ and the hours of work. We also solve the model when we specify the utility function as disutility in hours: $U=\log (c)-\psi\left(h^{1+1 / \theta} /(1+1 / \theta)\right)$. We set $\theta$ and $\psi$ to match the same labour supply elasticity and average hours as in the benchmark model. The local multiplier in this case is 0.19 and the aggregate is 0.38 . + +Benabou tax function. Our benchmark tax function consists of a transfer and a linear tax in household earnings. As an alternative, we use a Benabou-type of parametric tax function: + +$$ +\mathcal{T}_{t}=[w x h+\delta(1-\omega) D]-\left(1-\tau_{0}\right)[w x h+\delta(1-\omega) D]^{1-\tau_{1}} +$$ + +We set $\tau_{0}$ to match the same government-output ratio as in the benchmark model and $\tau_{1}=$ 0.036 based on Guner et al. (2014). With this specification, the local multiplier is 0.17 , and the aggregate multiplier is 0.30 . + +High-wealth economy. In our benchmark calibration, we abstract from other illiquid forms of wealth (for example, houses). As a robustness exercise, we consider an alternative steady-state\\ +economy that features a much higher wealth-output ratio relative to the benchmark model. We assume that only the patient households hold this additional wealth. We do so by calibrating the discount factor parameters (mean and dispersion) jointly to achieve (i) a wealth-output ratio three times higher the benchmark target and (ii) that the impatient households hold the same amount of assets as in the benchmark model. Adding very wealthy individuals decreases the annual MPC from 0.37 to 0.34 . The wealthy households already have a very low MPC, so making them even wealthier does not significantly affect the average. + +Great recession. We simulate an episode that resembles the Great Recession. First, we introduce a discount factor shock which decreases consumer demand to a magnitude similar to the decline documented in the Great Recession. In addition, the monetary authority sets the nominal rate based on the aggregate inflation rate $\hat{\pi}$ using the rule $R_{t}=\max \left\{\underline{\mathrm{R}}, R_{s s}+\zeta \hat{\pi}_{t}\right\}$. The nominal rate is constrained by the effective lower bound $R$. The decline in consumer demand generates deflation and hence, pushes the nominal rate to the effective lower bound. The monetary authority resumes an active response to inflation once the effective lower bound no longer binds, gradually raising the rate back to its steady-state level (in contrast, in the benchmark model the nominal interest rate is fully pegged). ${ }^{31}$ + +We compute the aggregate multiplier as follows. First, in the model with the shocks described above, we compute the aggregate consumption path. Second, we compute the aggregate consumption path in a model with only discount factor shocks. The aggregate multiplier is computed by the difference in these paths normalized by the aggregate government spending. We find that the aggregate multiplier in this experiment is 0.35 versus 0.41 in our benchmark case. Thus, moving from a fully fixed nominal rate (as in our benchmark) to one that combines an effective lower bound period with a resumption of an active response to inflation reduces our multiplier only slightly. The reason is that the bulk of the government spending occurs, both in the data and the model, while the economy is constrained by the lower bound. If the stimulus had taken place during a time of unconstrained monetary policy, the aggregate multiplier would be much smaller than the benchmark (see Section 5.6). + +Normal times multiplier. We compute a "normal times" fiscal multiplier by adjusting the model in two dimensions. First, we switch from an interest rate peg (as in the Benchmark) to a conventional Taylor rule of the form $R_{t}=\left(1-\rho_{R}\right) R_{s s}+\rho_{R}\left[R_{t-1}+\phi_{\pi} \hat{\pi}+\phi_{y} \hat{y}\right]$ where $\rho_{R}=0.8, \phi_{y}=0.2$, and $\phi_{\pi}=1.5$. Second, we calibrate the government spending process based on U.S. historical data. Specifically, we use a simple AR(1) with a persistence parameter of 0.85 as in Nakamura and Steinsson (2014). The normal times two- and four-year output multipliers are 0.46 and 0.25 , respectively, which are consistent with the values reported by Ramey and Zubairy (2018) (equal to 0.26 and 0.21 , respectively). + +\section*{7. CONCLUSION} +The response of private consumer spending to a fiscal stimulus injection is at the heart of the income multiplier debate. We estimate a positive response of consumer spending to the Recovery + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{30} + \item We calibrate the effective lower bound so that interest rates are temporarily unresponsive for about three years. Empirically, interest rates remained at the lower bound for longer but such a feature would require a counterfactually large and persistent decline in consumer demand. The effective lower bound in our model is set at one percentage point lower than the normal level of the interest rate (annualized). One justification is that interest rates in a broader class of savings and borrowing instruments (e.g. government debt, credit card debt) declined but did not go to zero. +\end{enumerate} +}Act (2009-12) using regional variation. Localities that received $\$ 1$ more in government spending spent $\$ 0.29$ on non-durable spending and $\$ 0.09$ in auto purchases. + +We estimate the aggregate response of consumer spending to fiscal stimulus using a quantitative equilibrium model. Our model is novel in that it embeds a regional framework into a heterogeneous agents, incomplete markets, new Keynesian model. The model generates a positive local non-durable consumption multiplier consistent with the data. This is a new finding and distinguishes our incomplete markets model from the existing literature that employed regional models with complete markets. The model predicts an aggregate non-durable consumption multiplier equal to 0.41 . This falls in the upper bound of estimates found in the literature (Hall, 2009). + +Acknowledgments. We thank Dirk Krueger and five anonymous referees for extremely valuable advice. We also thank our discussants Karel Mertens and Claudia Sahm, as well as Gabriel Chodorow-Reich, Olivier Coibion, Erik Hurst, Greg Kaplan, Pete Klenow, David Lagakos, Alisdair McKay, Emi Nakamura, Valerie Ramey, Morten Ravn, Jon Steinsson, Gianluca Violante, and seminar participants at USCD, Wisconsin-Madison, UCL, Federal Reserve Bank of Minneapolis, Columbia GSB, NBER conference on Micro Data for Macro Models, and Barcelona Summer Forum 2018. The views expressed here are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of St. Louis, the Federal Reserve Bank of Richmond, the Federal Reserve Bank of San Francisco, or the Federal Reserve System. + +\section*{Supplementary Data} +Supplementary data are available at Review of Economic Studies online. + +\section*{Data Availability Statement} +The non-confidential data and codes underlying this article are available in Zenodo, at \href{https://doi.org/}{https://doi.org/} 10.5281/zenodo.7483326. 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(2011), "Simple Analytics of the Government Expenditure Multiplier", American Economic Journal: Macroeconomics, 3, 1-35. + +\begin{enumerate} + \item + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{6} + \item + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{10} + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{12} + \item + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{14} + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{15} + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{16} + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{26} + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{27} + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{29} + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{30} + \item +\end{enumerate} + + +\end{document} \ No newline at end of file diff --git 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On the fiscal side, classic Ricardian-equivalence debates ({cite:t}`Barro1974-at`; surveys and critiques such as {cite:t}`Bernheim1987-or`) were progressively reframed by models with uncertainty, distortionary taxes, and constrained households ({cite:t}`Kimball1989-xe`; {cite:t}`Trostel1993-in`; {cite:t}`Daniel1993-yn`; {cite:t}`Hubbard1994-dp`). In this line of work, temporary tax timing changes can affect real activity because some households are liquidity constrained or face precautionary motives, so tax cuts alter disposable income and labor supply in ways that are not offset one-for-one by forward-looking savings.\n", + "\n", + "At the same time, the paper builds on the computational and empirical foundations of incomplete-markets macro. Foundational models of uninsured idiosyncratic risk ({cite:t}`Huggett1993-ft`; {cite:t}`Aiyagari1994-qp`) and subsequent quantitative work on income/wealth distributions and aggregate dynamics ({cite:t}`Krusell1998-ev`; {cite:t}`Castaneda2003-xk`; {cite:t}`Rios-Rull1997-le`) made it feasible to evaluate fiscal policy in economies with realistic heterogeneity and occasionally binding borrowing constraints. Micro evidence on liquidity constraints and consumption responses to predictable tax changes ({cite:t}`Zeldes1989-pk`; {cite:t}`Jappelli1990-qd`; {cite:t}`Souleles1999-jf`; {cite:t}`Shapiro2003-zu`) gave these mechanisms empirical discipline. Heathcote's contribution was to combine these strands in a fully quantitative GE framework and show that, relative to complete markets, temporary proportional income-tax cuts can produce larger short-run consumption responses and a different composition of demand between consumption and investment.\n" + ], + "id": "eadff64f" + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## 5 foundational papers \n", + "\n", + "1. **Aiyagari (1994), _Uninsured Idiosyncratic Risk and Aggregate Saving_** ({cite:t}`Aiyagari1994-qp`) *(Incomplete-markets core)* \n", + " Canonical framework with borrowing constraints and precautionary saving; establishes how uninsured risk changes aggregate responses to fiscal policy.\n", + "\n", + "2. **Huggett (1993), _The Risk-Free Rate in Heterogeneous-Agent Incomplete-Insurance Economies_** ({cite:t}`Huggett1993-ft`) *(Incomplete insurance and asset pricing)* \n", + " Foundational quantitative environment showing how uninsurable risk and self-insurance through assets reshape equilibrium interest rates and household behavior.\n", + "\n", + "3. **Kimball and Mankiw (1989), _Precautionary Saving and the Timing of Taxes_** ({cite:t}`Kimball1989-xe`) *(Tax timing and uncertainty)* \n", + " Key theoretical bridge from tax timing to real effects via precautionary motives, directly relevant for temporary tax-cut experiments.\n", + "\n", + "4. **Hubbard, Skinner, and Zeldes (1994), _Precautionary Saving and Social Insurance_** ({cite:t}`Hubbard1994-dp`) *(Liquidity constraints and policy design)* \n", + " Demonstrates how insurance programs and borrowing limits interact with household saving behavior, central for non-Ricardian fiscal transmission.\n", + "\n", + "5. **Souleles (1999), _The Response of Household Consumption to Income Tax Refunds_** ({cite:t}`Souleles1999-jf`) *(Micro evidence on consumption responses)* \n", + " Influential household-level evidence that consumers respond measurably to tax timing, supporting the empirical relevance of constrained-agent models.\n", + "\n", + "Together, these papers provide the conceptual and quantitative foundations for {cite:t}`Heathcote2005-wf`: fiscal effects arise through heterogeneity, incomplete insurance, borrowing constraints, and measurable household consumption responses." + ], + "id": "c52e9d42" + } + ], + "metadata": { + "kernelspec": { + "display_name": "Python 3", + "language": "python", + "name": "python3" + }, + "language_info": { + "name": "python" + } + }, + "nbformat": 4, + "nbformat_minor": 5 +} \ No newline at end of file diff --git a/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/Heathcote2005-wf_subsequent-literature.ipynb b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/Heathcote2005-wf_subsequent-literature.ipynb new file mode 100644 index 00000000..cd0a3665 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/Heathcote2005-wf_subsequent-literature.ipynb @@ -0,0 +1,57 @@ +{ + "cells": [ + { + "cell_type": "markdown", + "id": "a2c7261e", + "metadata": {}, + "source": [ + "# Subsequent literature\n", + "\n", + "The post-2005 literature around {cite:t}`fiscal_heathcote_2005` develops along four linked tracks, and the papers in this bibliography span all of them. First, empirical work on tax timing, transfers, and fiscal demand effects moves from reduced-form debates to policy-design evidence: early household response evidence ({cite:t}`consumer_shapiro_2003`) is complemented by policy overviews ({cite:t}`fiscal_spilimbergo_2009`), targeted-transfer analysis ({cite:t}`targeted_oh_2012`), structural interpretation of rebate responses ({cite:t}`model_kaplan_2014`), automatic stabilizer design ({cite:t}`role_mckay_2016`), and distribution-sensitive tax effects on growth and employment ({cite:t}`tax_zidar_2019`; {cite:t}`workers_cantore_2021`). In spirit, this is a direct continuation of Heathcote's core question: when and for whom does fiscal policy move consumption and labor in incomplete markets?\n", + "\n", + "Second, a quantitative heterogeneous-agent macro toolkit matures and becomes standard for fiscal analysis. Surveys and synthesis pieces ({cite:t}`quantitative_heathcote_2009`; {cite:t}`quantitative_krusell_2009`; {cite:t}`microeconomic_kaplan_2018`) clarify how cross-sectional risk, liquidity, and portfolio structure map into aggregate dynamics. Distributional and asset-structure work ({cite:t}`wealth_benhabib_2015`; {cite:t}`distributional_domeij_2004`) further strengthens the case that incidence and heterogeneity are not side issues but central state variables. This stream provides the computational and conceptual infrastructure that later fiscal-monetary HANK papers rely on.\n", + "\n", + "Third, macro-financial conditions are shown to be central for fiscal transmission. Credit shocks and precautionary behavior ({cite:t}`credit_guerrieri_2011`; {cite:t}`precautionary_challe_2016`) interact with debt constraints and fiscal space ({cite:t}`sustainable_derasmo_2015`; {cite:t}`global_kose_2021`) to condition multiplier size. Housing and asset-pricing channels ({cite:t}`equilibrium_sommer_2013`; {cite:t}`implications_sommer_2018`) reinforce that household balance-sheet composition affects both redistribution and aggregate demand responses. These papers extend the borrowing-constraint logic in Heathcote (2005) into environments where financial structure and debt sustainability are explicit constraints on policy design.\n", + "\n", + "Fourth, the field integrates fiscal and monetary policy in fully distributional models. Monetary-distribution mechanisms ({cite:t}`doves_gornemann_2016`; {cite:t}`monetary_kaplan_2018`; {cite:t}`monetary_auclert_2019`) and demand-block synthesis ({cite:t}`keynesian_bilbiie_2020`) feed into modern fiscal multiplier and joint-policy frameworks ({cite:t}`fiscal_hagedorn_2019`; {cite:t}`heterogeneous_ferrire_2014`; {cite:t}`fiscal_auclert_2024`). Even broader conceptual synthesis attempts (for example {cite:t}`interdisciplinary__2017`) point in the same direction: policy evaluation now requires integrating heterogeneity, institutions, and general equilibrium. Overall, the papers in this list suggest a clear trajectory from Heathcote's original contribution toward policy rules that are explicitly distribution-aware, financing-aware, and regime-dependent.\n" + ] + }, + { + "cell_type": "markdown", + "id": "e9c01a47", + "metadata": {}, + "source": [ + "## Most important papers for understanding the full subsequent trajectory (3-5)\n", + "\n", + "1. **Heathcote, Storesletten, and Violante (2009), _Quantitative Macroeconomics with Heterogeneous Households_** ({cite:t}`quantitative_heathcote_2009`) \n", + " Establishes the modern quantitative heterogeneous-agent baseline that made later fiscal incidence and multiplier analysis feasible.\n", + "\n", + "2. **Oh and Reis (2012), _Targeted Transfers and the Fiscal Response to the Great Recession_** ({cite:t}`targeted_oh_2012`) \n", + " Pivotal for shifting attention from aggregate spending totals to who receives transfers and how targeting changes aggregate effects.\n", + "\n", + "3. **Kaplan and Violante (2014), _A Model of the Consumption Response to Fiscal Stimulus Payments_** ({cite:t}`model_kaplan_2014`) \n", + " Connects micro evidence on rebate responses to structural heterogeneous-agent mechanisms, making fiscal transmission empirically disciplined.\n", + "\n", + "4. **Kaplan, Moll, and Violante (2018), _Monetary Policy According to HANK_** ({cite:t}`monetary_kaplan_2018`) \n", + " Core framework integrating heterogeneous balance sheets and general equilibrium, now central for both monetary and fiscal analysis.\n", + "\n", + "5. **Auclert, Rognlie, and Straub (2024), _Fiscal and Monetary Policy with Heterogeneous Agents_** ({cite:t}`fiscal_auclert_2024`) \n", + " Current synthesis paper: joint fiscal-monetary policy design with heterogeneity, financing, and redistribution in one tractable framework.\n", + "\n", + "If you want a top-3 only list spanning early, middle, and frontier stages, use {cite:t}`quantitative_heathcote_2009`, {cite:t}`model_kaplan_2014`, and {cite:t}`fiscal_auclert_2024`.\n" + ] + } + ], + "metadata": { + "kernelspec": { + "display_name": "Python 3", + "language": "python", + "name": "python3" + }, + "language_info": { + "name": "python" + } + }, + "nbformat": 4, + "nbformat_minor": 5 +} diff --git a/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/Heathcote2005-wf_summary.ipynb b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/Heathcote2005-wf_summary.ipynb new file mode 100644 index 00000000..d18fca34 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/Heathcote2005-wf_summary.ipynb @@ -0,0 +1,156 @@ +{ + "cells": [ + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "# Paper Summary" + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "slide" + } + }, + "source": [ + "## Overview\n", + "\n", + "- **Question:** How much do temporary income-tax changes move real activity when households are heterogeneous, borrowing constrained, and exposed to uninsurable idiosyncratic risk?\n", + "- **Core mechanism:** Tax timing affects constrained households' disposable income and therefore consumption, while proportional taxes also distort labor supply and saving decisions.\n", + "- **Main quantitative result (benchmark model):** A temporary cut in the proportional income tax rate increases aggregate consumption on impact by about **$0.29 per $1 of tax revenue lost** (PCT about 28.8 cents).\n", + "- **Market structure result:** Relative to complete markets, incomplete markets produce a **larger consumption response** and a **smaller investment response**, because constrained households spend more of the tax cut.\n", + "- **Bottom line:** Distortionary taxation explains most aggregate non-neutrality, but incomplete markets strongly shape the composition of responses across consumption vs. investment and across households." + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Prior Literature Summary\n", + "\n", + "This paper extends pre-2005 work on Ricardian equivalence, liquidity constraints, and incomplete-markets macro by combining them in one quantitative GE framework. Earlier theory showed that temporary tax timing can matter when taxes are distortionary, markets are incomplete, or borrowing limits bind; empirical studies of tax rebates and withholding changes showed sizable household spending responses, especially among low-wealth households.\n", + "\n", + "Heathcote's contribution is to quantify these channels jointly and compare incomplete vs. complete markets under common calibration targets. \n", + "\n", + "*For a fuller discussion, see [Prior Literature](Heathcote2005-wf_prior-literature.ipynb).*" + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Empirical Motivation in the Paper\n", + "\n", + "The paper reviews evidence that consumption reacts to predictable tax changes, often by more than strict Ricardian equivalence would imply. It highlights both aggregate studies and micro natural-experiment evidence (tax rebates, withholding changes, refunds), with sizable short-run MPC estimates. It also reviews direct evidence on borrowing constraints and wealth poverty (credit denials, low-liquid-asset households), motivating a model where many households are near a borrowing limit.\n", + "\n", + "The empirical targets used for calibration include U.S.-style wealth concentration, tax-revenue dynamics, and realistic idiosyncratic wage risk persistence/dispersion.\n" + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "slide" + } + }, + "source": [ + "## Model Setup\n", + "\n", + "- **Households:** Infinitely lived (baseline), ex ante identical, face idiosyncratic labor-productivity shocks, and cannot borrow (asset bound at zero).\n", + "- **Markets:** Incomplete insurance; households self-insure with a single saving asset.\n", + "- **Preferences:** Greenwood-Hercowitz-Huffman utility, so labor supply responds to after-tax wages in a tractable way.\n", + "- **Government:** Constant public spending; taxes switch stochastically between high and low regimes while debt is kept within bounds via a Markov tax rule.\n", + "- **Comparative structures:** The paper studies multiple nested economies (lump-sum vs proportional taxes, incomplete vs complete markets, open vs closed economy pricing) to isolate each source of non-neutrality." + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Calibration and Numerical Method\n", + "\n", + "- **Calibration targets:** Wealth concentration (including bottom-tail wealth shares), debt-to-GDP moments, tax-revenue mean/volatility/persistence, and household productivity risk moments.\n", + "- **Key parameters (baseline):** annual model, $\\beta=0.96$, $\\alpha=0.36$, depreciation $0.10$, Frisch elasticity around $0.3$, and tax regimes calibrated to match U.S. postwar dynamics.\n", + "- **Computation:** Krusell-Smith style algorithm with households forecasting aggregate capital using a low-dimensional state (capital, debt, tax regime). The paper reports very small forecast errors for future prices, supporting this approximation.\n", + "\n", + "The calibration strategy is designed so that policy experiments compare economies that match the same broad U.S. moments, making differences in outcomes attributable to model structure rather than ad hoc parameter changes." + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Main Quantitative Results\n", + "\n", + "1. **Lump-sum taxes, fixed labor and prices:**\n", + " - Complete markets: Ricardian benchmark (PCT about 0).\n", + " - Incomplete markets: PCT about **13.5 cents** per $1 tax-revenue change.\n", + "\n", + "2. **Lump-sum taxes with endogenous labor (open vs closed economy):**\n", + " - Open economy: PCT about **14.9 cents**.\n", + " - Closed economy: PCT falls to **11.4 cents** because higher consumption is partly offset by lower investment (about **-0.66%** impact).\n", + "\n", + "3. **Proportional taxes (benchmark comparison):**\n", + " - Incomplete markets: hours +0.97%, GDP +0.62%, consumption +0.92%, investment +0.56%, PCT about **28.8 cents**.\n", + " - Complete markets: similar output effects but lower consumption response (PCT about **23.2 cents**) and stronger investment response (+0.80%).\n", + "\n", + "4. **Heterogeneity matters:**\n", + " - Low-wealth, low-income households are most tax-sensitive at the micro level.\n", + " - Aggregate responses are damped relative to micro responses because high-wealth households account for a large share of total consumption." + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "slide" + } + }, + "source": [ + "## Interpretation and Takeaways\n", + "\n", + "- Distortionary taxation is the main source of large aggregate non-neutrality, but incomplete markets materially alter who adjusts and whether adjustment shows up more in consumption or investment.\n", + "- Relative to complete markets, incomplete markets amplify short-run consumption responses because constrained households cannot smooth as much and therefore spend more out of temporary tax relief.\n", + "- Intergenerational redistribution by itself appears quantitatively limited in this framework: the OLG appendix implies only a small PCT (around 4-5 cents), far below the benchmark incomplete-markets/proportional-tax result.\n", + "- The paper helps reconcile large micro responses to tax changes with more moderate aggregate responses by emphasizing composition: high-MPC households are not the largest spenders in levels." + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Subsequent Literature Summary\n", + "\n", + "Subsequent work generalizes this paper's logic from tax-timing experiments to broader policy design: targeted transfers, automatic stabilizers, fiscal-monetary interaction, and distributional incidence are all analyzed in heterogeneous-agent frameworks. Over time, the field moved from asking whether fiscal policy is non-neutral to asking how effects vary by financing method, recipient group, balance-sheet position, and macro-financial regime.\n", + "\n", + "A key continuity with Heathcote (2005) is that incomplete insurance and household heterogeneity remain central for quantitative fiscal transmission.\n", + "\n", + "*For the full synthesis and selected key papers, see [Subsequent Literature](Heathcote2005-wf_subsequent-literature.ipynb).*" + ] + } + ], + "metadata": { + "celltoolbar": "Slideshow", + "kernelspec": { + "display_name": ".venv-linux-x86_64", + "language": "python", + "name": "python3" + }, + "language_info": { + "codemirror_mode": { + "name": "ipython", + "version": 3 + }, + "file_extension": ".py", + "mimetype": "text/x-python", + "name": "python", + "nbconvert_exporter": "python", + "pygments_lexer": "ipython3", + "version": "3.12.3" + } + }, + "nbformat": 4, + "nbformat_minor": 2 +} diff --git a/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/index.md b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/index.md new file mode 100644 index 00000000..e52c1eed --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/index.md @@ -0,0 +1,15 @@ +--- +title: "Fiscal Policy with Heterogeneous Agents and Incomplete Markets -- Ballpark Entry" +--- + +```{include} Heathcote2005-wf_intro.ipynb +``` + +```{include} Heathcote2005-wf_summary.ipynb +``` + +```{include} Heathcote2005-wf_prior-literature.md +``` + +```{include} Heathcote2005-wf_subsequent-literature.md +``` \ No newline at end of file diff --git a/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/myst.yml b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/myst.yml new file mode 100644 index 00000000..278886e2 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/myst.yml @@ -0,0 +1,14 @@ +version: 1 +project: + title: "Fiscal Policy with Heterogeneous Agents and Incomplete Markets — Ballpark Entry" + bibliography: + - self.bib + - references.bib + - subsequent-literature.bib + toc: + - file: Heathcote2005-wf_intro.ipynb + - file: Heathcote2005-wf_prior-literature.ipynb + - file: Heathcote2005-wf_summary.ipynb + - file: Heathcote2005-wf_subsequent-literature.ipynb +site: + title: "Fiscal Policy with Heterogeneous Agents and Incomplete Markets — Ballpark Entry" \ No newline at end of file diff --git a/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/references.bib b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/references.bib new file mode 100644 index 00000000..91a77d63 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/references.bib @@ -0,0 +1,603 @@ +@ARTICLE{Fremling1994-is, + title = "Do Deficits Affect the Level of Insurance? 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Economy", + author = "Jappelli, T", + year = 1990 +} + +@ARTICLE{Haan1997-ia, + title = "{SOLVING} {DYNAMIC} {MODELS} {WITH} {AGGREGATE} {SHOCKS} {AND} + {HETEROGENEOUS} {AGENTS}", + author = "Haan, De and Wouter, J", + journal = "Macroecon. Dyn.", + year = 1997 +} + +@ARTICLE{Feldstein1986-wo, + title = "The Effects of Fiscal Policies When Incomes are Uncertain: a + Contradiction to Ricardian Equivalence", + author = "Feldstein, M", + year = 1986 +} + +@ARTICLE{Cox1993-dc, + title = "The Effect Of Borrowing Constraints On Consumer Liabilities", + author = "Cox, Donald and Japelli, Tullio", + journal = "Res. Pap. Econ. Fin.", + year = 1993 +} + +@ARTICLE{Cardia1997-sn, + title = "Replicating Ricardian Equivalence Tests with Simulated Series", + author = "Cardia, Emanuela", + journal = "Am. Econ. 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Econ.", + year = 1989 +} + +@ARTICLE{Floden1998-cz, + title = "Idiosyncratic risk in the {U}.s. and Sweden: Is there a role for + government insurance?", + author = "Flodén, Martin and Lindé, J", + month = sep, + year = 1998 +} + +@ARTICLE{Aiyagari1994-qp, + title = "Uninsured idiosyncratic risk and aggregate saving", + author = "Aiyagari, S R", + journal = "Q. J. Econ.", + publisher = "Oxford University Press (OUP)", + volume = 109, + number = 3, + pages = "659--684", + abstract = "We present a qualitative and quantitative analysis of the + standard growth model modified to include precautionary saving + motives and liquidity constraints. We address the impact on the + aggregate saving rate, the importance of asset trading to + individuals, and the relative inequality of wealth and income + distributions.", + month = aug, + year = 1994, + language = "en" +} + +@ARTICLE{Huggett1993-ft, + title = "The risk-free rate in heterogeneous-agent incomplete-insurance + economies", + author = "Huggett, Mark", + journal = "J. Econ. Dyn. Control", + publisher = "Elsevier BV", + volume = 17, + number = "5-6", + pages = "953--969", + abstract = "Why has the average real risk-free interest rate been less than + one percent? The question is motivated by the failure of a class + of calibrated representative-agent economies to explain the + average return to equity and risk-free debt. I construct an + economy where agents experience uninsurable idiosyncratic + endowment shocks and smooth consumption by holding a risk-free + asset. I calibrate the economy and characterize equilibria + computationally. With a borrowing constraint of one year's + income, the resulting risk-free rate is more than one percent + below the rate in the comparable representative-agent economy.", + month = sep, + year = 1993, + language = "en" +} + +@ARTICLE{Floden2001-vb, + title = "Idiosyncratic risk in the United States and Sweden: Is there a + role for government insurance?", + author = "Floden, Martin and Lindé, Jesper", + journal = "Rev. Econ. Dyn.", + publisher = "Elsevier BV", + volume = 4, + number = 2, + pages = "406--437", + month = apr, + year = 2001, + language = "en" +} diff --git a/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/self.bib b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/self.bib new file mode 100644 index 00000000..0cce1db0 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/self.bib @@ -0,0 +1,19 @@ +@ARTICLE{Heathcote2005-wf, + title = "Fiscal Policy with Heterogeneous Agents and Incomplete Markets", + author = "Heathcote, Jonathan", + journal = "Rev. Econ. Stud.", + volume = 72, + number = 1, + pages = "161--188", + abstract = "I undertake a quantitative investigation into the short run + effects of changes in the timing of proportional income taxes for + model economies in which heterogeneous households face a borrowing + constraint. Temporary tax changes are found to have large real + effects. In the benchmark model, a temporary tax cut increases + aggregate consumption on impact by around 29 cents for every + dollar of tax revenue lost. Comparing the benchmark + incomplete-markets model to a complete-markets economy, income tax + cuts provide a larger boost to consumption and a smaller + investment stimulus when asset markets are incomplete.", + year = 2005 +} diff --git a/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/source/Heathcote2005-wf.pdf b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/source/Heathcote2005-wf.pdf new file mode 100644 index 00000000..32bba2b5 Binary files /dev/null and b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/source/Heathcote2005-wf.pdf differ diff --git a/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/source/Heathcote2005-wf.tex b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/source/Heathcote2005-wf.tex new file mode 100644 index 00000000..eb28c0a8 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/source/Heathcote2005-wf.tex @@ -0,0 +1,1034 @@ +\documentclass[11pt]{article} +\usepackage[utf8]{inputenc} +\usepackage[T1]{fontenc} +\usepackage{amsmath} +\usepackage{amsfonts} +\usepackage{amssymb} +\usepackage[version=4]{mhchem} +\usepackage{stmaryrd} +\usepackage{caption} +\usepackage{multirow} +\usepackage{graphicx} +\usepackage[export]{adjustbox} +\graphicspath{ {./images/} } + +\title{Fiscal Policy with Heterogeneous Agents and Incomplete Markets } + +\author{JONATHAN HEATHCOTE\\ +Georgetown University} +\date{} + + +%New command to display footnote whose markers will always be hidden +\let\svthefootnote\thefootnote +\newcommand\blfootnotetext[1]{% + \let\thefootnote\relax\footnote{#1}% + \addtocounter{footnote}{-1}% + \let\thefootnote\svthefootnote% +} + +%Overriding the \footnotetext command to hide the marker if its value is `0` +\let\svfootnotetext\footnotetext +\renewcommand\footnotetext[2][?]{% + \if\relax#1\relax% + \ifnum\value{footnote}=0\blfootnotetext{#2}\else\svfootnotetext{#2}\fi% + \else% + \if?#1\ifnum\value{footnote}=0\blfootnotetext{#2}\else\svfootnotetext{#2}\fi% + \else\svfootnotetext[#1]{#2}\fi% + \fi +} + +\DeclareUnicodeCharacter{00D7}{\ifmmode\times\else{$\times$}\fi} + +\begin{document} +\maketitle +\captionsetup{singlelinecheck=false} +First version received April 2002; final version accepted December 2003 (Eds.) + +\begin{abstract} +I undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint. Temporary tax changes are found to have large real effects. In the benchmark model, a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost. Comparing the benchmark incomplete-markets model to a complete-markets economy, income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete. +\end{abstract} + +\section*{1. INTRODUCTION} +The Ricardian insight, revisited by Barro (1974), is that with lump-sum taxes, perfect capital markets, and dynastic households, changes in the timing of taxes should not affect households' optimal consumption decisions. Thus the Ricardian theory predicts an equivalence in terms of prices and allocations between any time paths for taxes that imply the same total present value for tax revenue. In contrast to this theoretical result, a large amount of empirical work suggests that the timing of taxes does matter. For example, Bernheim (1987) argues that "virtually all (aggregate consumption function) studies indicate that every dollar of deficits stimulates between $\$ 0 \cdot 20$ and $\$ 0.50$ of current consumer spending". In the hope of reconciling the apparent gap between the Ricardian view and the empirical evidence, various authors have explored quantitative theoretical models in which one or more of the conditions for Ricardian equivalence are not satisfied. + +First, when taxes are not lump-sum, changes in the timing of taxes will typically affect the optimal intertemporal allocation of labour effort, consumption and investment (see, for example, Auerbach and Kotlikoff (1987), Trostel (1993), Braun (1994), McGrattan (1994)). Second, if asset market imperfections are such that some households in the economy would like to borrow but cannot find credit, then these households will adjust consumption in response to temporary tax changes (see Hubbard and Judd (1986), Feldstein (1988), Altig and Davis (1989), Daniel (1993)). Third, Ricardian equivalence will fail if a tax cut reduces the tax burden on the current generation at the expense of future generations and if intergenerational altruism is imperfect (see Poterba and Summers, 1987). Fourth, households may adjust consumption in response to temporary tax changes if they myopically ignore the implications of long run budget balance. + +In this paper I consider various alternative model economies in order to quantify the importance of distortionary taxation, capital market imperfections and imperfect intergenerational altruism for generating deviations for Ricardian equivalence. I do not experiment with alternatives to the rational expectations assumption, and assume throughout that households always assign the correct probability to each possible future sequence for tax rates. + +Capital market imperfections are modelled following the approach developed by Bewley (undated), Huggett (1993) and Aiyagari (1994). Heterogeneous households receive idiosyncratic\\ +shocks to labour efficiency which cannot be insured. They can reduce the sensitivity of consumption to income changes by accumulating precautionary holdings of a single asset. However, if asset holdings ever reach zero then further dis-saving is prohibited; households face a borrowing constraint. Since households differ in their productivity histories, the model generates an endogenous cross-sectional distribution of asset holdings. + +The tax rate in the model is stochastic, so households face aggregate as well as idiosyncratic risk. Real government consumption and transfers are assumed constant, in order to isolate the effects of changes in the timing of taxes from other aspects of fiscal policy. The process for taxes is such that the share of aggregate output paid in taxes has the same persistence and variance as in the post-war U.S., and such that the ratio of debt to GDP remains bounded. + +I consider both lump-sum and proportional tax systems. When taxes are proportional to income, changes in the tax rate temporarily alter the returns to saving and to working, encouraging intertemporal substitution in consumption and labour supply. The intuition for why the borrowing constraint generates real effects from tax changes is straightforward. Households that are unfortunate enough to have both very low asset holdings and low current income would like to borrow against future income to increase consumption. They are unable to do so because of the borrowing constraint. If the government cuts taxes, such households can now increase consumption by the extent to which the tax cut raises disposable income. In this framework, the magnitude of the response of aggregate variables to tax changes depends on the fraction of households that are wealth-poor and thus potentially borrowing constrained. I therefore specify the process for labour productivity so that the model endogenously generates a distribution for asset holdings resembling that in the U.S. At the same time, the productivity process is restricted to be consistent with empirical estimates of the variance and persistence of wages. + +The main finding of the paper is that a combination of distortionary taxation and capital market imperfections can give rise to quantitatively important departures from Ricardian equivalence. For example, in simulations of the benchmark incomplete-markets model, income tax rate cuts from $34 \cdot 2 \%$ to $31 \cdot 8 \%$ are associated with an average immediate increase in aggregate consumption of 28.8 cents for each dollar of tax revenue lost. ${ }^{1}$ Simulation of a similar economy with complete asset markets indicates that most of this consumption response is attributable to the distortionary nature of the tax system rather than the presence of the borrowing constraint. However, in the incomplete-markets economy, the average percentage increase in consumption following a tax cut is almost twice as large as the increase in investment, while investment responds more strongly to tax changes than consumption when asset markets are assumed to be complete. Intergenerational redistribution of the tax burden is the least important source of non-neutrality. + +The rest of the paper is organized as follows. In the next section I review the empirical evidence on the response of aggregate consumption to tax changes, and the evidence on the importance of liquidity constraints at the household level. Section 3 contains a description of the model economies, along with a discussion of the choices for parameter values and the numerical solution methods. Section 4 discusses the results, and Section 5 concludes. + +\section*{2. EMPIRICAL EVIDENCE} +There is a large and rather inconclusive literature that tests for Ricardian equivalence (RE) by estimating consumption functions or Euler equations on aggregate time series (see, for opposing + +\footnotetext{\begin{enumerate} + \item The long run implications of debt accumulation in this type of economy are explored by Aiyagari and McGrattan (1998), who find that increasing the steady-state level of debt crowds out aggregate capital, raises the real interest rate, and reduces per capita consumption. A higher real interest rate makes assets less costly to hold and therefore more effective in smoothing individual consumption. Woodford (1990) examines similar questions in a more stylized model. +\end{enumerate} +} +conclusions, the surveys in Bernheim (1987) and Seater (1993)). One explanation for the lack of consensus is the problem of endogeneity. Cardia (1997) illustrates how the coefficient on the current budget deficit in an estimated consumption function (in which both output and the budget deficit are treated as independent variables) may be uninformative regarding the validity of RE if output responds immediately to tax changes. A second potential problem is that if current tax changes imply expected future government expenditure changes, then consumption might respond even if RE is true. As a third example, even if RE is false, consumption might not respond to anticipated tax changes; this is a central implication of the permanent income/life cycle hypothesis (PILCH) model. + +Given these difficulties, several authors have looked at various interesting natural experiments in which households saw large and reasonably well-understood changes in their disposable income. Various studies of the 1968 surtax and the 1975 rebate find quite large changes in aggregate consumption from these explicitly temporary tax changes. Modigliani and Steindal (1977) use large scale econometric models and estimate a marginal propensity to consume (MPC) over two quarters out of the 1975 rebate of between $0 \cdot 3$ and $0 \cdot 58$. Blinder (1981) examines both tax changes using a model based on the permanent income hypothesis and estimates a MPC of 0.16 over a quarter. Poterba (1988), using an Euler-equation-based estimation, reports a MPC of between 0.13 and 0.27 within a month. ${ }^{2}$ Wilcox (1989) finds large effects on consumption from the sequence of increases in social security benefits since 1965, even though these increases were always announced at least 6 weeks in advance. + +Studies based on micro data have typically found even larger consumption responses to policy-induced income changes. Looking at the pre-announced Reagan tax cuts and using data from the Consumer Expenditure Survey (CEX), Souleles (2002) estimates a very large MPC for non-durables of between 0.6 and 0.9 . Parker (1999), also using the CEX, estimates a MPC for non-durable goods of 0.20 for income changes associated with predictable changes in social security tax with-holding. Souleles (1999) finds the MPC out of predictable income tax refunds to be between 0.35 and 0.6 within a quarter. Finally, Shapiro and Slemrod $(1995,2003)$ report that $43 \%$ of survey respondents planned to spend most of the extra disposable income associated with the 1992 reduction in the standard rate of income tax with-holding, while $22 \%$ planned to spend most of the income tax rebates associated with Bush’s Tax Relief Act in 2001. + +This apparent sensitivity of U.S. consumption to predictable changes in taxes or transfers is often attributed to the presence of liquidity constraints. What other evidence (in addition to the response of consumption to tax changes) supports the view that borrowing constraints affect a large fraction of the population? + +Borrowing constraints should have the largest impact on those households closest to the constraint, an implication that has been repeatedly exploited in empirical work on panel data. In a sample from the Panel Study of Income Dynamics (PSID), Zeldes (1989) identifies the wealth-poorest and richest households. He rejects a permanent-income-hypothesis-based Euler equation for the poor, estimates a positive missing multiplier (suggesting they face a binding borrowing constraint), and finds that they exhibit excess consumption growth. ${ }^{3}$ Further crosssectional evidence consistent with the presence of borrowing constraints is that households with + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{1} + \item Poterba also finds that consumption did not appear to respond significantly to the passage of five large tax bills (including the 1968 and 1975 changes), even though it did respond when these tax changes were eventually implemented. The finding that aggregate consumption responds to predictable tax changes is in principle consistent with optimal forward-looking behaviour if some households are borrowing constrained. + \item Euler-equation-based tests may not be the best way to identify the presence of borrowing constraints. In the models described in Section 3, the borrowing constraint is typically binding for very few households in equilibrium (so the Euler equation is satisfied with equality for most households), yet the presence of the constraint affects the consumption and savings decisions of every household in the economy. See Attanasio (1999) for more discussion of this point. +\end{enumerate} +} +low asset holdings appear to consume too little and have too little debt (see Hayashi (1985), Cox and Jappelli (1993)). ${ }^{4}$ + +In the 1983 Survey of Consumer Finance, Jappelli (1990) finds that $12 \cdot 5 \%$ of households report having requests for credit rejected, while a further $6.5 \%$ do not apply because they expected credit to be refused. Thus, according to this measure, $19 \%$ of the U.S. population was liquidity constrained on at least one date in the year or two prior to the survey. Jappelli also finds that $74 \cdot 1 \%$ of those households whose net worth is less than $15 \%$ of their disposable income are liquidity constrained, suggesting that wealth-poor households are much more susceptible to finding themselves in the position of wishing to borrow but being unable to find credit. Gross and Souleles (2002) find that increases in credit card limits generate immediate and significant increases in debt, and that the propensity to consume out of extra liquidity is much larger for people near their credit limits. + +Because both theory and empirical evidence suggest a close connection between the characteristics of having low wealth and being unable to borrow, it is important to know how many wealth-poor households there are in the U.S. Díaz-Giménez, Quadrini and Ríos-Rull (1997) report that in 1992 the poorest $40 \%$ of households held only $1.35 \%$ of total wealth, that approximately $3 \cdot 4 \%$ of households had zero wealth, and that another $3 \cdot 5 \%$ had negative wealth (suggesting that these households were able to take out imperfectly collateralized loans). ${ }^{5}$ + +Overall, these numbers suggest that a large fraction of the population may be at or near to their borrowing limit, and that this limit is close to zero. In the model described below I assume that no borrowing is permitted. To the extent that non-collateralized borrowing is possible, the constraint imposed here is too tight. To the extent that certain types of wealth such as consumer durables are too illiquid to be readily adjusted to smooth through income shocks, it is too loose. + +\section*{3. THE MODELS} +I start with some very simple models and gradually add layers of realism. In particular, beginning with a complete-markets, exogenous-labour, fixed-price, lump-sum-taxation, infinite-horizon setting, I sequentially incorporate asset market incompleteness, endogenous labour supply, endogenous factor prices and proportional taxation. ${ }^{6}$ All these economies are closely related, so rather than describe each in fine detail, in the remainder of this section I focus on the version with incomplete markets, endogenous labour supply, closed economy-equilibrium prices and proportional taxation. I shall refer to this as the benchmark model, since it is the richest and the most realistic. After describing the details of this economy, I outline the calibration strategy and the numerical solution method. + +A large (measure one) number of households are ex ante identical and infinitely lived (or, equivalently, perfectly altruistic towards their children). They maximize expected discounted utility from consumption and leisure. In aggregate, household savings decisions determine the evolution of the capital stock, which in turn determines aggregate output and the return to saving. + +Households face idiosyncratic labour productivity shocks, and markets which in principle could allow complete insurance against this risk are assumed not to exist. Instead there is a single risk-free savings instrument which enables households to partially self-insure by accumulating precautionary asset holdings. Given this market structure, a household with positive wealth\\ +4. Souleles (1999) finds that on receipt of tax refunds, the non-durable consumption of those with low asset holdings rises much more than that of the rich. However, neither Souleles (2002) nor Parker (1999) find much evidence of a link between low asset holdings and excess sensitivity of consumption to predictable changes in income.\\ +5. Weicher (1997) investigates the position of households with negative net worth in some detail. In 1992 only $11.8 \%$ of those households with negative net worth (or $0.57 \%$ of the total population) had net worth of less than $-\$ 10,000$.\\ +6. In the Appendix, I also consider the implications of adding an age dimension to the household's problem.\\ +responds to a fall in household income by temporarily dis-saving. An important assumption is that no borrowing is permitted, which limits the ability of low-wealth households to smooth consumption in the face of falls in their disposable income. + +The government finances constant government spending by issuing one period debt and levying taxes. Contrary to the assumption in Aiyagari and McGrattan (1998), the tax level is stochastic. The presence of aggregate risk means that in equilibrium there is intertemporal variation in the joint distribution over productivity and wealth. + +Individual states. A household's effective labour supply depends both on the hours it works and on its household-specific labour productivity, which is stochastic. At any date $t$, a household's productivity takes one of $l$ values in the set $E$. Each household's productivity evolves independently according to a first-order Markov chain with transition probabilities defined by the $l \times l$ matrix $\Pi$. The probability distribution at $t$ over $E$ is represented by a row vector $p_{t} \in \mathrm{R}^{l}$, where $p_{t} \geq 0$ and $\sum_{i=1}^{l} p_{i t}=1$. If the probability distribution at date 0 is given by $p_{0}$ the distribution at $t$ is given by $p_{t}=p_{0} \Pi^{t}$. Given certain assumptions (which will be satisfied here) $E$ has a unique ergodic set with no cyclically moving subsets and $\left\{p_{t}\right\}_{t=0}^{\infty}$ converges to a unique limit $p^{*}$ for any $p_{0}$. Thus, given a population of measure 1 , we can reinterpret $p_{t}$ as describing the distribution of the population across productivity states at date $t$. I assume that $p_{0}=p^{*}$, and impose an appropriate normalization such that $\sum_{i=1}^{l} p_{i}^{*} e_{i}=1$. + +There are two assets in this economy (capital and government debt) but by assumption they will pay the same return state by state. Thus the household effectively has access to a single savings instrument. Let $A$ be the set of possible values for a household's holdings of this asset. I assume that a household's wealth at the start of period 0 , denoted $a_{-1}$, is non-negative and that households are never able to borrow. This may be thought of either as an ad hoc borrowing limit or as the appropriate endogenous constraint for an economy in which there is no punishment for default. Thus $A \subset \mathrm{R}_{+}$. Let ( $A, \mathcal{A}$ ) and ( $E, \mathcal{E}$ ) be measurable spaces where $\mathcal{A}$ denotes the Borel sets that are subsets of $A$ and $\mathcal{E}$ is the set of all subsets of $E$. Let $e^{t}=\left\{e_{0}, \ldots, e_{t}\right\}$ denote a partial sequence of productivity shocks from date 0 up to date $t$, and let $e_{s}\left(e^{t}\right)$ denote the $s$-th element of this sequence $(s \leq t)$. Let $\left(E^{t}, \mathcal{E}^{t}\right), t=0,1, \ldots$ denote product spaces, and define probability measures + + +\begin{equation*} +\mu^{t}: \mathcal{E}^{t} \rightarrow[0,1], \quad t=0,1, \ldots \tag{3.1} +\end{equation*} + + +where, for example, $\mu^{t}\left(e^{t}\right)$ is the probability of individual history $e^{t}$.\\ +Aggregate states. The aggregate state of the economy at date zero, $z_{0}$, is defined by two objects: a measure $\lambda: \mathcal{A} \times \mathcal{E} \rightarrow[0,1]$ describing the distribution of households across individual wealth and individual productivity at time 0 , and the date 0 level of government debt $B_{-1} .^{7}$ + +The only source of aggregate uncertainty in the model is the stochastic process for the economy-wide tax rate. This means that (given $z_{0}$ ) the aggregate state of the economy at $t$ can be described by the history of the tax rate from date 0 up to and including date $t$. I call this object the aggregate history to date $t$, and denote it $h^{t}$. Let $\tau_{s}\left(h^{t}\right)$ denote the $s$-th element of this sequence. Let $\left(h^{t}, \mathcal{H}^{t}\right), t=0,1, \ldots$ denote product spaces, and define probability measures + + +\begin{equation*} +v^{t}: \mathcal{H}^{t} \rightarrow[0,1], \quad t=0,1, \ldots \tag{3.2} +\end{equation*} + + +where, for example, $\nu^{t}\left(h^{t}: z_{0}\right)$ is the probability of aggregate history $h^{t}$. I shall use the notation $h^{t} \succeq h^{t-1}$ to indicate that $h^{t}$ is a possible continuation of $h^{t-1}$. + +\footnotetext{\begin{enumerate} + \setcounter{enumi}{6} + \item The dependence of aggregate variables on $z_{0}$ and the dependence of household specific variables on $a_{-1}$ are henceforth generally suppressed in the interests of brevity. +\end{enumerate} +}The household's problem. In period 0 , each household chooses labour supply, savings and consumption for each possible sequence of individual productivity shocks and aggregate tax shocks, given the individual and aggregate states ( $a_{-1}$ and $z_{0}$ ). Let the sequences of measurable functions + +\[ +\left.\begin{array}{l} +n_{t}: H^{t} \times E^{t} \rightarrow[0,1] \tag{3.3}\\ +a_{t}: H^{t} \times E^{t} \rightarrow A \\ +c_{t}: H^{t} \times E^{t} \rightarrow \mathrm{R}_{+} +\end{array}\right\} \quad t=0,1, \ldots +\] + +describe this plan, where, for example, $a_{t}\left(h^{t}, e^{t}\right)$ denotes the choice for savings that will be implemented at $t$ if the aggregate history to date $t$ is $h^{t}$ and the individual history is $e^{t}$. Note that choices for consumption and labour supply have to be non-negative after every history, and labour supply cannot exceed the total time endowment which is equal to 1 . + +Expected discounted lifetime utility is given by + + +\begin{equation*} +\sum_{t=0}^{\infty} \beta^{t} \sum_{h^{t} \in H^{t}} \nu^{t}\left(h^{t}\right) \sum_{e^{t} \in E^{t}} \mu^{t}\left(e^{t}\right) u\left(c_{t}\left(h^{t}, e^{t}\right), n_{t}\left(h^{t}, e^{t}\right)\right) \tag{3.4} +\end{equation*} + + +where $\beta$ is the subjective discount factor. For the benchmark version of the model, I assume that the period utility function has the form introduced by Greenwood, Hercowitz and Huffman (1988): + + +\begin{equation*} +u(c, n)=\frac{1}{1-\gamma}\left[\left(c-\psi \frac{n^{1+1 / \varepsilon}}{1+1 / \varepsilon}\right)^{1-\gamma}-1\right] \tag{3.5} +\end{equation*} + + +Here $\gamma$ is the coefficient of relative risk aversion and $\varepsilon$ is the intertemporal (Frisch) elasticity of labour supply. ${ }^{8}$ + +The pre-tax real return to supplying one unit of effective labour at date $t$ is given by the measurable function $w_{t}: H^{t} \rightarrow \mathrm{R}$. Similarly, the net one-period pre-tax return to one unit of the asset purchased at $t-1$ after history $h^{t}$ is $r_{t}\left(h^{t}\right)$. The tax rate at $t$ is assumed to take one of two possible values, $\tau_{t}\left(h^{t}\right) \in T=\left\{\tau_{l}, \tau_{h}\right\}$. In the benchmark version of the model, taxes are proportional, and apply equally to both asset and labour income. Thus the household budget constraint is given by + + +\begin{align*} +c_{t}\left(h^{t}, e^{t}\right)+a_{t}\left(h^{t}, e^{t}\right)= & {\left[1+\left(1-\tau_{t}\left(h^{t}\right)\right) r_{t}\left(h^{t}\right)\right] a_{t-1}\left(h^{t-1}, e^{t-1}\right) } \\ +& +\left(1-\tau_{t}\left(h^{t}\right)\right) w_{t}\left(h^{t}\right) e_{t}\left(e^{t}\right) n_{t}\left(h^{t}, e^{t}\right) \tag{3.6} +\end{align*} + + +for all $e^{t} \in E^{t}$ such that $e^{t} \succeq e^{t-1}$, for all $h^{t} \in H^{t}$ such that $h^{t} \succeq h^{t-1}$, for $t=0,1, \ldots$, and where $a_{-1}\left(h^{-1}, e^{-1}\right)=a_{-1}$. + +The solution to the household's problem is a set of decision functions (3.3) that maximize equation (3.4) taking as given (i) the household budget constraints (3.6), (ii) the price and tax functions $w_{t}, r_{t}$ and $\tau_{t}$, (iii) the probability measures (3.2) and (3.1), and (iv) the initial state $\left(a_{-1}, z_{0}\right)$. + +Production. Aggregate output after history $h_{t}, Y_{t}\left(h^{t}\right)$, is produced by competitive firms according to a Cobb-Douglas technology: + +$$ +Y_{t}\left(h^{t}\right)=K_{t-1}\left(h^{t-1}\right)^{\alpha} N_{t}\left(h^{t}\right)^{1-\alpha} \quad h^{t} \succeq h^{t-1} +$$ + +where $K_{t-1}\left(h^{t-1}\right)$ denotes the capital stock in place at the start of period $t, N_{t}\left(h^{t}\right)$ denotes aggregate effective labour supply, and $\alpha \in(0,1)$. Output can be transformed into private\\ +8. The utility function is only defined for $c \geq 0, n \geq 0$ and $c \geq \psi \frac{n^{1+1 / \varepsilon}}{1+1 / \varepsilon}$.\\ +consumption, government consumption, and new capital according to + + +\begin{equation*} +C_{t}\left(h^{t}\right)+G_{t}\left(h^{t}\right)+K_{t}\left(h^{t}\right)=Y_{t}\left(h^{t}\right)+(1-\delta) K_{t-1}\left(h^{t-1}\right) \quad h^{t} \succeq h^{t-1} \tag{3.7} +\end{equation*} + + +where $C_{t}\left(h^{t}\right)$ denotes aggregate private consumption, $G_{t}\left(h^{t}\right)$ denotes government consumption, and $\delta \in[0,1]$ is the rate of depreciation. + +Labour supply. The utility function given in equation (3.5) has the convenient property that the labour supply choice is independent of the consumption/savings choice. In particular, assuming an interior solution, optimal individual labour supply is a simple function of the household-specific after-tax real return to working: + + +\begin{equation*} +n_{t}\left(h^{t}, e^{t}\right)=\left[\frac{w_{t}\left(h^{t}\right) e_{t}\left(e^{t}\right)\left(1-\tau_{t}\left(h^{t}\right)\right)}{\psi}\right]^{\varepsilon} \tag{3.8} +\end{equation*} + + +Note that optimal labour supply does not depend on household wealth or on the history of productivity shocks up to $t-1$. In the context of this heterogeneous agents model, these properties have the useful implication that equilibrium aggregate effective labour supply depends only on the inherited aggregate capital stock, the current economy-wide tax rate, and the time-invariant distribution over the set of productivity shocks: + + +\begin{equation*} +N_{t}\left(h^{t}\right)=\left(\sum_{i=1}^{l} p_{i}^{*} e_{i}^{1+\varepsilon}\left[\frac{(1-\alpha) K_{t-1}\left(h^{t-1}\right)^{\alpha}\left(1-\tau_{t}\left(h^{t}\right)\right)}{\psi}\right]^{\varepsilon}\right)^{\frac{1}{1+\alpha \varepsilon}} \tag{3.9} +\end{equation*} + + +Government. Real government spending is assumed constant and equal to $G$. Real government debt issued at date $t$ is denoted $B_{t}\left(h^{t}\right)$. Income from debt and income from capital are assumed to be taxed at the same rate. After any history debt is assumed to pay a pre-tax one-period real return equal to the economy-wide rate of return $r_{t}\left(h^{t}\right)$. In versions of the model with either lump-sum taxation or exogenous labour supply, the one-period-ahead pre-tax return to capital is known, since next period capital is determined before observing next period’s tax rate. Thus in these cases return equalization emerges as a property of equilibrium rather than reflecting an assumption about debt policy; one-period debt must offer the same pre-tax rate of return as capital if households are to be willing to hold both. More generally, the advantage of having debt and capital pay the same return state by state is that households do not have to keep track of how their wealth is divided between capital and debt or solve a portfolio choice problem. ${ }^{9}$ + +Let aggregate asset holdings at the start of period $t+1$ be given by $A_{t}\left(h^{t}\right)$. The government's budget constraint is + + +\begin{equation*} +B_{t}\left(h^{t}\right)+\tau_{t}\left(h^{t}\right)\left[r_{t}\left(h^{t}\right) A_{t-1}\left(h^{t-1}\right)+w_{t}\left(h^{t}\right) N_{t}\left(h^{t}\right)\right]=\left(1+r_{t}\left(h^{t}\right)\right) B_{t-1}\left(h^{t-1}\right)+G \tag{3.10} +\end{equation*} + + +where $h^{t} \succeq h^{t-1}$ and $B_{-1}\left(h^{-1}\right)=B_{-1}$.\\ +The process for taxes. The observation that the effects of current tax changes cannot be studied independently of the future tax changes that they imply is at the heart of the Ricardian equivalence proposition. However, even if government spending is held constant, many different paths for taxes are consistent with a stationary debt to GDP ratio.\\ +9. One example of an alternative assumption in the endogenous-labour, proportional tax case would be to have debt offer a risk-free one-period pre-tax return. However, the difference between this alternative and the assumed debt policy is likely to be small. The reason is that the pre-tax return to assets is already close to risk-free. The only shock in the model that affects this return is the tax shock, and the only way tax shocks affect the pre-tax return is by affecting hours, which in turn are relatively tax-insensitive. + +The approach taken in this paper is to impose exogenous constant bounds on the level of debt issued by the government in the period, $B_{t}\left(h^{t}\right) \in D=\left[D_{l}, D_{h}\right]$, and to assume that the tax rate follows a Markov process such that if initial debt lies in the set $D$, then future debt always remains within $D$. This is implemented by ensuring that debt is always falling when $\tau=\tau_{h}$ and always rising when $\tau=\tau_{l}$, and by specifying transition probabilities such that for values of $B_{t}\left(h^{t}\right)$ close to $D_{h}$ the probability of the high tax is always 1 , while for $B_{t}\left(h^{t}\right)$ close to $D_{l}$ it is always $0 .^{10}$ There is evidence that this is a reasonable specification for taxes. In particular, Bohn (1998) finds that the U.S. government has historically responded to increases in the debt-GDP ratio by raising the primary surplus, and that the debt-GDP ratio is mean-reverting once one controls for war-time spending and cyclical fluctuations. + +Let $\pi_{\tau}: T \times D \times T \rightarrow[0,1]$ denote the time invariant transition probability function for taxes, where $\pi_{\tau}\left((\tau, B), \tau^{\prime}\right)$ is the probability that next period's tax rate is $\tau^{\prime}$ given that the current tax rate is $\tau$ and the amount of new debt issued is $B$. The specification for $\pi_{\tau}$ adopted is as follows: + +\begin{center} +\begin{tabular}{cccc} +\hline + & $B \leq \underline{D}$ & $\underline{D}R} P \tag{A.1} +\end{equation*} + + +where $\psi_{a>R}$ is an indicator that takes the value one beyond retirement age, and $s_{a}$ captures the survivor's premium associated with the presence of annuity markets. + +From the household's perspective there is no economic difference between labour income and pension income, so the particular choices for $N, R$ and $P$ are not crucial. Older households with lower survival probabilities will be the most eager to consume out of tax cuts. I therefore consider two alternative assumptions: (i) all households pay the same lump-sum taxes, or (ii) retired households are tax exempt. + +Agents enter the labour force on their 20-th birthday, retire on their 60-th birthday, and live to a maximum age of 109. These assumptions pin down $R$ and $A$. Survival probabilities are taken from the U.S. Decennial Life Tables for 1989-1991 published by the National Center for Health Statistics, and are for the total population. The parameters $\beta, \alpha$ and $\delta$ are set to the same values used in the economies previously studied. The lump-sum pension is set such that on average aggregate wealth is equal to capital plus debt, implying a zero net-foreign-asset position. The implied replacement rate is $36 \%$ of working-age labour income when everyone pays taxes, and 0 when retirees are tax exempt. The process for taxes is calibrated following exactly the same procedure as in the economies previously discussed. + +In a 10,000 period simulation of the version of this economy in which everyone pays taxes, the mean aggregate response of consumption to tax cuts is very small; for every dollar lost in revenue, consumption increases on impact by only 5 cents (see Table 11). This number is very similar to those reported by Hubbard and Judd (1986) and Poterba and Summers (1987). The corresponding figure for the version in which retirees are tax exempt is only 4 cents. + +How does the average response vary by age? Considering the version in which everyone pays taxes, for every dollar of revenue lost when taxes are cut 21 -year-old households increase consumption by only $0 \cdot 6$ cents, 30 year olds by 0.9 cents, 50 year olds by 2.6 cents, 70 year olds by 7.9 cents, 90 year olds by 24.9 cents and 109 year olds by 73.9 cents. Clearly the wealth effect is working as expected: older households with lower expected lifetimes have a higher propensity to consume out of temporary tax cuts. However, for most households life expectancy is long relative to the duration of tax cuts. Thus most households do not expect a large fraction of a tax cut to be paid for by future generations. This is why so few households optimally consume a big chunk of a tax cut (less than $2 \%$ of the population is over 90 ). + +Introducing intergenerational altruism would reduce the response of consumption to tax changes. As in the infinitehorizon economies previously considered, endogenizing the interest rate would also reduce the consumption response.\\ +37. The presence of annuity markets is essential for this implication. + +Making taxes proportional to income rather than lump-sum would reduce the consumption response to the extent that older people have lower incomes. Thus I conclude that 4 or 5 cents per dollar is an upper bound for the propensity to consume out of tax cuts driven purely by intergenerational redistribution. + +Acknowledgements. I thank the Economics Program of the National Science Foundation for financial support. 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(1989), "Consumption and Liquidity Constraints: An Empirical Investigation", Journal of Political Economy, 97, 305-346. + +\begin{enumerate} + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{1} + \item + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{6} + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{11} + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{12} + \item + \item + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{22} + \item + \item + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{25} + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{27} + \item + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{30} + \item + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{32} + \item + \item + \item +\end{enumerate} + +\begin{enumerate} + \setcounter{enumi}{35} + \item +\end{enumerate} + + +\end{document} \ No newline at end of file diff --git a/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/subsequent-literature.bib b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/subsequent-literature.bib new file mode 100644 index 00000000..a6b1b7ed --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/Heathcote2005-wf/subsequent-literature.bib @@ -0,0 +1,264 @@ +% Exported from Litmaps (https://www.litmaps.com) + +@article{role_mckay_2016, + title = {The role of automatic stabilizers in the U.S. business cycle}, + doi = {10.3982/ecta11574}, + author = {McKay, Alisdair and Reis, Ricardo}, + journal = {Econometrica}, + year = {2016}, + litmapsId = {126607626} +} + + +@article{targeted_oh_2012, + title = {Targeted Transfers and the Fiscal Response to the Great Recession}, + doi = {10.1016/j.jmoneco.2012.10.025}, + author = {Oh, Hyunseung and Reis, Ricardo}, + journal = {Journal of Monetary Economics}, + year = {2012}, + litmapsId = {132726757} +} + + +@article{doves_gornemann_2016, + title = {Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy}, + doi = {10.17016/ifdp.2016.1167}, + author = {Gornemann, Nils and Kuester, Keith and Nakajima, Makoto}, + journal = {Social Science Research Network}, + year = {2016}, + litmapsId = {35118833} +} + + +@article{model_kaplan_2014, + title = {A Model of the Consumption Response to Fiscal Stimulus Payments}, + doi = {10.3982/ecta10528}, + author = {Kaplan, Greg and Violante, Giovanni L.}, + journal = {Econometrica}, + year = {2014}, + litmapsId = {105833592} +} + + +@article{fiscal_heathcote_2005, + title = {Fiscal Policy with Heterogeneous Agents and Incomplete Markets}, + doi = {10.1111/0034-6527.00328}, + author = {Heathcote, J.}, + year = {2005}, + litmapsId = {103926683} +} + + +@article{monetary_auclert_2019, + title = {Monetary Policy and the Redistribution Channel}, + doi = {10.1257/aer.20160137}, + author = {Auclert, Adrien}, + journal = {The American Economic Review}, + year = {2019}, + litmapsId = {122884840} +} + + +@article{consumer_shapiro_2003, + title = {Consumer response to tax rebates}, + doi = {10.1257/000282803321455368}, + author = {Shapiro, Matthew D. and Slemrod, Joel}, + journal = {The American Economic Review}, + year = {2003}, + litmapsId = {158479139} +} + + +@article{microeconomic_kaplan_2018, + title = {Microeconomic Heterogeneity and Macroeconomic Shocks}, + doi = {10.2139/ssrn.3203913}, + author = {Kaplan, Greg and Violante, G.}, + journal = {Journal of Economic Perspectives}, + year = {2018}, + litmapsId = {281652137} +} + + +@article{global_kose_2021, + title = {Global Waves of Debt: Causes and Consequences}, + doi = {10.1596/978-1-4648-1544-7}, + author = {Kose, M. and Nagle, P. and Ohnsorge, F. and Sugawara, Naotaka}, + year = {2021}, + litmapsId = {180870172} +} + + +@article{distributional_domeij_2004, + title = {On The Distributional Effects Of Reducing Capital Taxes*}, + doi = {10.1111/j.1468-2354.2004.00135.x}, + author = {Domeij, David and Heathcote, Jonathan}, + journal = {International Economic Review}, + year = {2004}, + litmapsId = {250100273} +} + + +@article{tax_zidar_2019, + title = {Tax Cuts For Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment}, + doi = {10.1086/701424}, + author = {Zidar, Owen}, + journal = {Journal of Political Economy}, + year = {2019}, + litmapsId = {178054724} +} + + +@article{precautionary_challe_2016, + title = {Precautionary Saving Over the Business Cycle}, + doi = {10.1111/ecoj.12189}, + author = {Challe, E. and Ragot, X.}, + year = {2016}, + litmapsId = {112400688} +} + + +@article{fiscal_hagedorn_2019, + title = {The fiscal multiplier}, + doi = {10.3386/w25571}, + author = {Hagedorn, Marcus and Manovskii, Iourii and Mitman, Kurt}, + journal = {Social Science Research Network}, + year = {2019}, + litmapsId = {225403829} +} + + +@article{implications_sommer_2018, + title = {Implications of US Tax Policy for House Prices, Rents, and Homeownership}, + doi = {10.1257/aer.20141751}, + author = {Sommer, K. and Sullivan, P.}, + year = {2018}, + litmapsId = {14219345} +} + + +@article{equilibrium_sommer_2013, + title = {The equilibrium effect of fundamentals on house prices and rents}, + doi = {10.1016/j.jmoneco.2013.04.017}, + author = {Sommer, Kamila and Sullivan, Paul and Verbrugge, Randal J.}, + journal = {Journal of Monetary Economics}, + year = {2013}, + litmapsId = {37697822} +} + + +@article{interdisciplinary__2017, + title = {An Interdisciplinary Model for Macroeconomics}, + doi = {10.2139/ssrn.3079789}, + author = {, }, + journal = {Microeconomics: General Equilibrium & Disequilibrium Models eJournal}, + year = {2017}, + litmapsId = {268574411} +} + + +@article{wealth_benhabib_2015, + title = {The wealth distribution in Bewley economies with capital income risk}, + doi = {10.1016/j.jet.2015.07.013}, + author = {Benhabib, Jess and Bisin, Alberto and Zhu, Shenghao}, + journal = {Journal of Economics Theory}, + year = {2015}, + litmapsId = {179503044} +} + + +@article{sustainable_derasmo_2015, + title = {What is a Sustainable Public Debt?}, + doi = {10.2139/ssrn.2660332}, + author = {D’Erasmo, P. and Mendoza, E. and Zhang, Jing}, + year = {2015}, + litmapsId = {238439695} +} + + +@article{monetary_kaplan_2018, + title = {Monetary Policy According to HANK}, + doi = {10.1257/aer.20160042}, + author = {Kaplan, Greg and Moll, Benjamin and Violante, Giovanni L.}, + journal = {The American Economic Review}, + year = {2018}, + litmapsId = {191180622} +} + + +@article{workers_cantore_2021, + title = {Workers, capitalists, and the government: fiscal policy and income (re)distribution}, + doi = {10.1016/j.jmoneco.2021.01.004}, + author = {Cantore, Cristiano and Freund, Lukas}, + journal = {Journal of Monetary Economics}, + year = {2021}, + litmapsId = {164223959} +} + + +@article{fiscal_spilimbergo_2009, + title = {Fiscal Multipliers}, + doi = {10.5089/9781462372737.004}, + author = {Spilimbergo, Antonio and Schindler, Martin and Symansky, Steven}, + journal = {IMF staff position note}, + year = {2009}, + litmapsId = {101769182} +} + + +@article{quantitative_krusell_2009, + title = {Quantitative Macroeconomic Models with Heterogeneous Agents}, + doi = {10.1017/ccol0521871522.008}, + author = {Krusell, Per and Smith, Anthony A. and Melo, Rafael Lopes de}, + year = {2009}, + litmapsId = {28930995} +} + + +@article{heterogeneous_ferrire_2014, + title = {The Heterogeneous Effects of Government Spending: It’S All About Taxes}, + doi = {10.17016/ifdp.2018.1237}, + author = {Ferrière, Axelle and Navarro, Gaston}, + journal = {International Finance Discussion Paper}, + year = {2014}, + litmapsId = {267769495} +} + + +@article{fiscal_auclert_2024, + title = {Fiscal and Monetary Policy with Heterogeneous Agents}, + doi = {10.3386/w32991}, + author = {Auclert, Adrien and Rognlie, M. and Straub, Ludwig}, + journal = {Social Science Research Network}, + year = {2024}, + litmapsId = {278341176} +} + + +@article{keynesian_bilbiie_2020, + title = {The New Keynesian cross}, + doi = {10.1016/j.jmoneco.2019.03.003}, + author = {Bilbiie, Florin Ovidiu}, + journal = {Journal of Monetary Economics}, + year = {2020}, + litmapsId = {225642313} +} + + +@article{quantitative_heathcote_2009, + title = {Quantitative Macroeconomics with Heterogeneous Households}, + doi = {10.3386/w14768}, + author = {Heathcote, Jonathan and Storesletten, Kjetil and Violante, Giovanni L.}, + journal = {Annual Review of Economics}, + year = {2009}, + litmapsId = {261442009} +} + + +@article{credit_guerrieri_2011, + title = {Credit Crises, Precautionary Savings, and the Liquidity Trap}, + doi = {10.3386/w17583}, + author = {Guerrieri, Veronica and Lorenzoni, Guido}, + year = {2011}, + litmapsId = {276190214} +} + diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission.slides.html b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission.slides.html deleted file mode 100644 index 16cfaaf2..00000000 --- a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission.slides.html +++ /dev/null @@ -1,13474 +0,0 @@ - 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Paper 2: "Population Aging and the Transmission of Monetary Policy to Consumption"
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Arlene Wond (2015)
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Nino Kodua
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Johns Hopkins University
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February 16, 2020

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Overview

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  • Research Question: What are the effects of demographic changes on the transmission of monetary policy to consumption?
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  • Part I: Empirical estimate
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    • Age-specific consumption elasticities to interest rate
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      • Consumption of young people is two-three times more responsive to interest rate shocks
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    • Uninsurable labor income risk, life-cycle saving motive, fixed-rate mortgage structure
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Household's maximization problem

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      - - -\begin{aligned}V_{j a t}\left(z_{j a t}\right)=\max \left\{V_{j a t}\left(z_{j a t}\right)^{\mathrm{rent}}, V_{j a t}\left(z_{j a t}\right)^{\mathrm{own} \& \text { no-adjust }}, V_{j a t}\left(z_{j a t}\right)^{\text {own } \& \text { adjust }}\right\}\end{aligned} - -
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- - \begin{aligned} -z_{j a t}=\left\{S_{t}, y_{j a t}, \operatorname{assets}_{j, a-1, t-1}\right\} -\end{aligned} - -

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1. Rent Case

- -\begin{aligned}V_{j a t}\left(z_{j a t}\right)^{\mathrm{rent}}=\max _{c_{j a t}, h_{j a t}^{\mathrm{rat}}, s_{j a t}} \frac{\left(c_{j a t}^{\alpha} \cdot h_{j a t}^{1-\alpha}\right)^{1-\sigma}-1}{1-\sigma}+E_{j a t}\left[V_{j, a+1, t+1}\left(z_{j, a+1, t+1}\right)\right]\end{aligned} - -

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- - \begin{aligned} s.t. h_{j a t} &=h_{j a t}^{\text {rent }} \\ c_{j a t}+s_{j a t}+p_{t}^{r} h_{j a t}^{\text {rent }} &=y_{j a t}+(1-\delta) p_{t} h_{j, a-1, t-1}^{\text {own }}+\left(1+r_{t}\right) s_{j, a-1, t-1}-b_{j, a-1, t-1}\left(1+R_{j, a-1, t-1}\right) \\ h_{j a t}^{\text {own }} &=b_{j a t}=0 \\ s_{j a t} & \geq-\underline{s} \\ \log \left(y_{j a t}\right) &=\chi_{a}+\eta_{j a t}+\phi_{a}\left(y_{t} / y\right) \\ S_{t} &=A_{0}+A_{1} S_{t-1}+u_{t} \end{aligned} - -

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2. Own & No-adjust Case

- -\begin{aligned}V_{j a t}\left(z_{j a t}\right)^{\text {own \& no-adjust }}=\max _{c_{j a t}, s_{j a t}} \frac{\left(c_{j a t}^{\alpha} \cdot h_{j a t}^{1-\alpha}\right)^{1-\sigma}-1}{1-\sigma}+E_{j a t}\left[V_{j, a+1, t+1}\left(z_{j, a+1, t+1}\right)\right]\end{aligned} - -

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- - \begin{aligned} s.t. h_{j a t} &=(1-\delta) h_{j, a, t-1}^{\mathrm{own}} \\ c_{j a t}+s_{j a t} &=y_{j a t}+\left(1+r_{t}\right) s_{j, a-1, t-1}-M_{j a t} \\ s_{j a t} & \geq-\underline{s} \\ \log \left(y_{j a t}\right) &=\chi_{a}+\eta_{j a t}+\phi_{a}\left(y_{t} / y\right) \\ S_{t} &=A_{0}+A_{1} S_{t-1}+u_{t} \end{aligned} - -

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3. Own & Adjust Case

- -\begin{aligned}V_{j a t}\left(z_{j a t}\right)^{\text {own \& adjust }}=\max _{c_{j a t}, s_{j a t}, h_{j a t}^{\text {own }}, b_{j a t}} \frac{\left(c_{j a t}^{\alpha} \cdot h_{j a t}^{1-\alpha}\right)^{1-\sigma}-1}{1-\sigma}+E_{j a t}\left[V_{j, a+1, t+1}\left(z_{j, a+1, t+1}\right)\right] \end{aligned} - -

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- - \begin{aligned} s.t. h_{j a t} &=h_{j, a}^{\mathrm{own}} \\ b_{j a t} & \leq(1-\phi) p_{t} h_{j a t}^{\mathrm{own}} \\ c_{j a t}+s_{j a t}+p_{t} h_{j a t}^{\mathrm{own}}-b_{j a t}-F &=y_{j a t}+(1-\delta) p_{t} h_{j, a-1, t-1}^{\mathrm{own}}+\left(1+r_{t}\right) s_{j, a-1, t-1}-b_{j, a-1, t-1}\left(1+R_{j, a-1, t-1}\right) \\ s_{j a t} & \geq-\underline{s} \\ \log \left(y_{j a t}\right) &=\chi_{a}+\eta_{j a t}+\phi_{a}\left(y_{t} / y\right) \\ S_{t} &=A_{0}+A_{1} S_{t-1}+u_{t} \end{aligned} - -

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Retirement and Death

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  • Upon death, agent bequasts total new wealth:
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- -\begin{aligned}W_{j a t}=(1-\delta) p_{t} h_{j, a-1, t-1}^{\mathrm{own}}+\left(1+r_{t}\right) s_{j, a-1, t-1} - \end{aligned} - -

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Results

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  • The refinancing and new lending channel
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- - - - - - - diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_intro.ipynb b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_intro.ipynb new file mode 100644 index 00000000..933cd857 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_intro.ipynb @@ -0,0 +1,23 @@ +{ + "cells": [ + { + "cell_type": "markdown", + "id": "7067c25d", + "metadata": {}, + "source": [ + "Arlene Wong, 2016, Population Aging and the Transmission of Monetary Policy to Consumption, Research Papers in Economics and Finance\n", + "\n", + "Original ballpark: Nino Kodua — February 2020\n", + "\n", + "Updated by: Nathan Robino — February 2026" + ] + } + ], + "metadata": { + "language_info": { + "name": "python" + } + }, + "nbformat": 4, + "nbformat_minor": 5 +} diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_prior-literature.ipynb b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_prior-literature.ipynb new file mode 100644 index 00000000..c7f86771 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_prior-literature.ipynb @@ -0,0 +1,49 @@ +{ + "cells": [ + { + "cell_type": "markdown", + "id": "a1b2c3d4-e5f6-7890-abcd-ef1234567890", + "metadata": {}, + "source": [ + "# Prior Literature\n", + "\n", + "## The papers Wong cites\n", + "\n", + "Based on the bibliography, Wong (2016) appears to have filled several important gaps by synthesizing and extending the existing literature in novel ways:\n", + "\n", + "### Connecting Demographics to Monetary Policy Transmission\n", + "\n", + "Prior work had largely treated these as separate topics. On one hand, papers like Auerbach and Kotlikoff (1984, 1989), Abel (2002), and Ríos-Rull (1996, 2001) studied how demographics affect macroeconomic aggregates like capital accumulation and asset prices. On the other hand, papers like Auclert (2019), Kaplan and Violante (2014), and Di Maggio, Kermani, and Ramcharan (2014) studied how household heterogeneity affects monetary policy transmission. Wong appears to have been among the first to explicitly link population aging to the effectiveness of monetary policy through consumption responses, asking whether an aging population systematically changes how monetary policy works.\n", + "\n", + "### Integrating Multiple Transmission Channels\n", + "\n", + "The literature had identified several channels through which monetary policy affects consumption—housing wealth effects (Mian and Sufi 2013; Berger et al. 2018), mortgage refinancing (Hurst and Stafford 2004; Bhutta and Keys 2016), and redistribution between borrowers and savers (Doepke and Schneider 2006; Auclert 2019). Wong's contribution seems to have been showing how these channels vary systematically with age, since younger households are more likely to be borrowers with adjustable-rate mortgages while older households are more likely to hold interest-bearing assets.\n", + "\n", + "### Policy-Relevant Implications for Aging Societies\n", + "\n", + "While Imam (2015) and Juselius and Takáts (2015) had begun exploring whether demographics weaken monetary policy, Wong appears to have provided a more structural, microeconomic foundation by modeling how life-cycle consumption behavior interacts with monetary transmission. This offered a deeper understanding of why aging might matter, rather than simply documenting correlations.\n", + "\n", + "## Key foundational papers\n", + "\n", + "- **Kaplan and Violante (2014)**, \"A Model of the Consumption Response to Fiscal Stimulus Payments\" - This paper introduced the concept of \"wealthy hand-to-mouth\" households and demonstrated that heterogeneity in household balance sheets, particularly the distinction between liquid and illiquid assets, is crucial for understanding how policy affects consumption. This framework fundamentally shaped how economists think about monetary policy transmission through household heterogeneity, and is central to understanding why age—which correlates strongly with asset composition—matters for policy transmission.\n", + "\n", + "- **Auclert (2019)**, \"Monetary Policy and the Redistribution Channel\" - This paper provided a systematic theoretical framework for understanding how monetary policy affects consumption through redistribution across households with different exposures to interest rate changes. It decomposed the channels through which monetary policy operates (income, wealth, and interest rate exposure) and showed how household heterogeneity determines aggregate policy effectiveness. This directly motivates analyzing how demographic composition affects monetary transmission.\n", + "\n", + "- **Mian, Rao, and Sufi (2013)**, \"Household Balance Sheets, Consumption, and the Economic Slump\" - This empirical paper demonstrated the powerful connection between household balance sheets, housing wealth, and consumption at the regional level during the Great Recession. It established key empirical approaches for linking geographic variation in household financial positions to consumption responses, providing both methodological tools and motivation for studying how household characteristics mediate policy effects." + ] + } + ], + "metadata": { + "kernelspec": { + "display_name": "Python 3", + "language": "python", + "name": "python3" + }, + "language_info": { + "name": "python", + "version": "3.11.0" + } + }, + "nbformat": 4, + "nbformat_minor": 5 +} diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_subsequent-literature.ipynb b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_subsequent-literature.ipynb new file mode 100644 index 00000000..1b1cd7ae --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_subsequent-literature.ipynb @@ -0,0 +1,76 @@ +{ + "cells": [ + { + "cell_type": "markdown", + "id": "1af07073", + "metadata": {}, + "source": [ + "# Subsequent Literature\n", + "\n", + "## Papers that cite my ballpark paper\n", + "\n", + "I found 21 papers in LitMaps.\n", + "\n", + "## Research Directions That Emerged\n", + "\n", + "The literature citing Wong (2016) has developed along several interconnected trajectories:\n", + "\n", + "### 1. The Refinancing Channel as a Core Transmission Mechanism\n", + "\n", + "A major strand of research has focused intensively on mortgage refinancing as a key channel through which monetary policy affects household consumption. This includes both empirical work documenting the magnitude of these effects (Di Maggio et al. 2017; Abel and Fuster 2021; Amromin, Bhutta, and Keys 2020) and theoretical work modeling the state-dependent nature of refinancing behavior (Eichenbaum, Rebelo, and Wong 2022; Berger et al. 2021).\n", + "\n", + "### 2. Heterogeneous Agent New Keynesian (HANK) Models\n", + "\n", + "The field has moved decisively toward incorporating household heterogeneity into macroeconomic models of monetary policy. Kaplan, Moll, and Violante (2016) represents a watershed moment, establishing that models with heterogeneous agents produce fundamentally different predictions about monetary transmission than representative agent models. This framework has become the new benchmark for studying monetary policy.\n", + "\n", + "### 3. Regional and State-Dependent Heterogeneity\n", + "\n", + "Researchers have explored how the effects of monetary policy vary across space and time. Beraja et al. (2019) showed that the refinancing channel's strength depends on the regional distribution of housing equity, while Eichenbaum, Rebelo, and Wong (2022) demonstrated that monetary policy effectiveness depends on the state of the economy and the history of interest rates.\n", + "\n", + "### 4. Housing Market Structure and Mortgage Design\n", + "\n", + "Work by Guren, Krishnamurthy, and McQuade (2018) and Greenwald (2016) has examined how the institutional features of mortgage markets—contract terms, prepayment options, down payment requirements—shape monetary transmission. This connects to policy debates about optimal mortgage market design.\n", + "\n", + "### 5. Distributional Consequences of Monetary Policy\n", + "\n", + "Coibion et al. (2017) and the broader literature on monetary policy and inequality have examined how monetary policy affects different households differently, with implications for both efficiency and equity.\n", + "\n", + "---\n", + "\n", + "## What's Cutting-Edge Now\n", + "\n", + "The frontier of this literature appears to be:\n", + "\n", + "- **Path dependence and history dependence**: Understanding how past interest rates and refinancing decisions affect current policy effectiveness (Berger et al. 2021)\n", + "- **Endogenous housing and mortgage choices**: Models where households' housing tenure and mortgage decisions respond to policy, creating feedback effects (Kinnerud 2025; Guren et al. 2018)\n", + "- **Quantitative HANK models**: Calibrated models that can match micro-level consumption and balance sheet data while generating realistic aggregate dynamics\n", + "- **Interaction of multiple channels**: How refinancing, wealth effects, income effects, and redistribution channels interact and potentially offset each other\n", + "\n", + "---\n", + "\n", + "## Most Important Papers for Understanding Where the Field Is Heading\n", + "\n", + "### 1. Eichenbaum, Rebelo, and Wong (2022), \"State-Dependent Effects of Monetary Policy: The Refinancing Channel\"\n", + "\n", + "This paper (co-authored by Wong herself) represents a direct extension of the 2016 work. It demonstrates that monetary policy's effectiveness varies substantially depending on the distribution of existing mortgage rates in the economy. When many households have mortgages with rates above current market rates, monetary easing is powerful; when most have already refinanced, the channel is muted. This state dependence has profound implications for how central banks should think about policy in different environments and connects to debates about forward guidance and quantitative easing.\n", + "\n", + "### 2. Beraja, Fuster, Hurst, and Vavra (2019), \"Regional Heterogeneity and the Refinancing Channel of Monetary Policy\"\n", + "\n", + "This paper showed empirically that the refinancing channel's strength depends critically on local housing market conditions. Regions where homeowners had negative or low equity could not refinance even when rates fell, weakening monetary transmission precisely where stimulus was most needed. This geographic heterogeneity has important implications for understanding why monetary policy may have limited effectiveness following housing busts and connects to policy discussions about programs like HARP.\n", + "\n", + "### 3. Berger, Milbradt, Tourre, and Vavra (2021), \"Mortgage Prepayment and Path-Dependent Effects of Monetary Policy\"\n", + "\n", + "This paper develops a structural model showing how the history of interest rates affects the current distribution of mortgage rates, creating path dependence in monetary policy effectiveness. It provides a rigorous framework for understanding why the \"refinancing channel\" varies over time and offers tools for quantifying how past policy decisions constrain current policy options. This represents the cutting edge of integrating mortgage market microstructure into macroeconomic models.\n", + "\n", + "---\n" + ] + } + ], + "metadata": { + "language_info": { + "name": "python" + } + }, + "nbformat": 4, + "nbformat_minor": 5 +} diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_summary.ipynb b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_summary.ipynb new file mode 100644 index 00000000..572393ee --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/PopAgingMPtransmission_summary.ipynb @@ -0,0 +1,228 @@ +{ + "cells": [ + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "# Paper Summary" + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Prior Literature and Motivation\n", + "\n", + "Demographics and monetary policy transmission had been studied in largely separate literatures. Work on demographics ({cite:t}`Auerbach1984-qt,Auerbach1989-nb`; {cite:t}`Rios-Rull1996-jp,Rios-Rull2001-fa`) analyzed how aging affects capital accumulation and asset prices, while work on transmission ({cite:t}`Kaplan2014-ee`; {cite:t}`Auclert2019-dr`; {cite:t}`Mian2013-wr`) showed how household balance-sheet heterogeneity shapes consumption responses to interest rates. A small literature ({cite:t}`Imam2015-ee`; {cite:t}`Juselius2015-dk`) had documented correlations between aging and weaker monetary transmission, but without structural foundations. {cite:t}`Wong2016-ud` was among the first to explicitly link population aging to monetary policy effectiveness through age-varying consumption responses.\n", + "\n", + "*For a more detailed discussion of the prior literature, see [Prior Literature](PopAgingMPtransmission_prior-literature.ipynb).*" + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "slide" + } + }, + "source": [ + "## Overview\n", + "\n", + "* **Research Question: What are the effects of demographic changes on the transmission of monetary policy to consumption?**\n", + "* **Part I: Empirical estimate**\n", + " * **Age-specific consumption elasticities to interest rate**\n", + " * **Consumption of young people is two-three times more responsive to interest rate shocks**\n", + " * **Consumption elasticities decline with age**\n", + " * **Consumption response driven by homeowners**\n", + " * **refinance or new loans following interest rate decline**\n", + "* **Part II: Life-cycle model - partial equilibrium overlapping generations economy**\n", + " * **Uninsurable labor income risk, life-cycle saving motive, fixed-rate mortgage structure**\n", + " * **Fixed costs to adjust long-term assets**\n", + " * **housing and fixed-rate mortgage**" + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "slide" + } + }, + "source": [ + "## Household's maximization problem\n", + "\n", + "* **Each period households choose**\n", + " * **1. rent**\n", + " * **2. continue owning a house & not adjust existing mortgage**\n", + " * **3. adjust mortgage and housing stock**\n", + "* **Conditional on the adjustment, households choose**\n", + " * **non-durable consumption, savings in bonds and mortgage debt**\n", + "\n", + "$$\n", + "\\begin{aligned}\n", + "V_{j a t}\\left(z_{j a t}\\right)=\\max \\left\\{V_{j a t}\\left(z_{j a t}\\right)^{\\mathrm{rent}}, V_{j a t}\\left(z_{j a t}\\right)^{\\mathrm{own} \\& \\text{no-adjust}}, V_{j a t}\\left(z_{j a t}\\right)^{\\text{own} \\& \\text{adjust}}\\right\\}\n", + "\\end{aligned}\n", + "$$\n", + "\n", + "$$\n", + "\\begin{aligned}\n", + "z_{j a t}=\\left\\{S_{t}, y_{j a t}, \\operatorname{assets}_{j, a-1, t-1}\\right\\}\n", + "\\end{aligned}\n", + "$$\n", + "\n", + "* **$S_t$ - uncertainty from aggregate state variables**\n", + "* **$y_{j a t}$ - uncertainty from idiosyncratic labor income**" + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "subslide" + } + }, + "source": [ + "## 1. Rent Case\n", + "\n", + "$$\n", + "\\begin{aligned}\n", + "V_{j a t}\\left(z_{j a t}\\right)^{\\mathrm{rent}}=\\max _{c_{j a t}, h_{j a t}^{\\mathrm{rent}}, s_{j a t}} \\frac{\\left(c_{j a t}^{\\alpha} \\cdot h_{j a t}^{1-\\alpha}\\right)^{1-\\sigma}-1}{1-\\sigma}+E_{j a t}\\left[V_{j, a+1, t+1}\\left(z_{j, a+1, t+1}\\right)\\right]\n", + "\\end{aligned}\n", + "$$\n", + "\n", + "$$\n", + "\\begin{aligned}\n", + "\\text{s.t.} \\quad h_{j a t} &= h_{j a t}^{\\text{rent}} \\\\\n", + "c_{j a t}+s_{j a t}+p_{t}^{r} h_{j a t}^{\\text{rent}} &= y_{j a t}+(1-\\delta) p_{t} h_{j, a-1, t-1}^{\\text{own}}+\\left(1+r_{t}\\right) s_{j, a-1, t-1}-b_{j, a-1, t-1}\\left(1+R_{j, a-1, t-1}\\right) \\\\\n", + "h_{j a t}^{\\text{own}} &= b_{j a t}=0 \\\\\n", + "s_{j a t} &\\geq -\\underline{s} \\\\\n", + "\\log \\left(y_{j a t}\\right) &= \\chi_{a}+\\eta_{j a t}+\\phi_{a}\\left(y_{t} / y\\right) \\\\\n", + "S_{t} &= A_{0}+A_{1} S_{t-1}+u_{t}\n", + "\\end{aligned}\n", + "$$" + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "subslide" + } + }, + "source": [ + "## 2. Own & No-adjust Case\n", + "\n", + "$$\n", + "\\begin{aligned}\n", + "V_{j a t}\\left(z_{j a t}\\right)^{\\text{own \\& no-adjust}}=\\max _{c_{j a t}, s_{j a t}} \\frac{\\left(c_{j a t}^{\\alpha} \\cdot h_{j a t}^{1-\\alpha}\\right)^{1-\\sigma}-1}{1-\\sigma}+E_{j a t}\\left[V_{j, a+1, t+1}\\left(z_{j, a+1, t+1}\\right)\\right]\n", + "\\end{aligned}\n", + "$$\n", + "\n", + "$$\n", + "\\begin{aligned}\n", + "\\text{s.t.} \\quad h_{j a t} &= (1-\\delta) h_{j, a, t-1}^{\\mathrm{own}} \\\\\n", + "c_{j a t}+s_{j a t} &= y_{j a t}+\\left(1+r_{t}\\right) s_{j, a-1, t-1}-M_{j a t} \\\\\n", + "s_{j a t} &\\geq -\\underline{s} \\\\\n", + "\\log \\left(y_{j a t}\\right) &= \\chi_{a}+\\eta_{j a t}+\\phi_{a}\\left(y_{t} / y\\right) \\\\\n", + "S_{t} &= A_{0}+A_{1} S_{t-1}+u_{t}\n", + "\\end{aligned}\n", + "$$" + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "subslide" + } + }, + "source": [ + "## 3. Own & Adjust Case\n", + "\n", + "$$\n", + "\\begin{aligned}\n", + "V_{j a t}\\left(z_{j a t}\\right)^{\\text{own \\& adjust}}=\\max _{c_{j a t}, s_{j a t}, h_{j a t}^{\\text{own}}, b_{j a t}} \\frac{\\left(c_{j a t}^{\\alpha} \\cdot h_{j a t}^{1-\\alpha}\\right)^{1-\\sigma}-1}{1-\\sigma}+E_{j a t}\\left[V_{j, a+1, t+1}\\left(z_{j, a+1, t+1}\\right)\\right]\n", + "\\end{aligned}\n", + "$$\n", + "\n", + "$$\n", + "\\begin{aligned}\n", + "\\text{s.t.} \\quad h_{j a t} &= h_{j, a}^{\\mathrm{own}} \\\\\n", + "b_{j a t} &\\leq (1-\\phi) p_{t} h_{j a t}^{\\mathrm{own}} \\\\\n", + "c_{j a t}+s_{j a t}+p_{t} h_{j a t}^{\\mathrm{own}}-b_{j a t}-F &= y_{j a t}+(1-\\delta) p_{t} h_{j, a-1, t-1}^{\\mathrm{own}}+\\left(1+r_{t}\\right) s_{j, a-1, t-1}-b_{j, a-1, t-1}\\left(1+R_{j, a-1, t-1}\\right) \\\\\n", + "s_{j a t} &\\geq -\\underline{s} \\\\\n", + "\\log \\left(y_{j a t}\\right) &= \\chi_{a}+\\eta_{j a t}+\\phi_{a}\\left(y_{t} / y\\right) \\\\\n", + "S_{t} &= A_{0}+A_{1} S_{t-1}+u_{t}\n", + "\\end{aligned}\n", + "$$" + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "subslide" + } + }, + "source": [ + "## Retirement and Death\n", + "\n", + "* **Upon death, agent bequests total new wealth:**\n", + "\n", + "$$\n", + "\\begin{aligned}\n", + "W_{j a t}=(1-\\delta) p_{t} h_{j, a-1, t-1}^{\\mathrm{own}}+\\left(1+r_{t}\\right) s_{j, a-1, t-1}\n", + "\\end{aligned}\n", + "$$" + ] + }, + { + "cell_type": "markdown", + "metadata": { + "slideshow": { + "slide_type": "slide" + } + }, + "source": [ + "## Results\n", + "\n", + "* **The refinancing and new lending channel** \n", + " * **the difference in the consumption responses of the young-old to interest rate shocks**\n", + "* **Aging population can significantly dampen the transmission of monetary policy** " + ] + }, + { + "cell_type": "markdown", + "metadata": {}, + "source": [ + "## Subsequent Literature and Research Directions\n", + "\n", + "The literature following {cite:t}`Wong2016-ud` has deepened understanding of the refinancing channel as a state- and region-dependent mechanism ({cite:t}`statedependent_eichenbaum_2022`; {cite:t}`regional_beraja_2019`; {cite:t}`mortgage_berger_2021`), extended the framework into heterogeneous-agent New Keynesian (HANK) models ({cite:t}`monetary_kaplan_2016`), and examined how mortgage market design and distributional consequences shape transmission ({cite:t}`mortgage_guren_2018`; {cite:t}`innocent_coibion_2017`).\n", + "\n", + "*For a more detailed discussion of the subsequent literature, see [Subsequent Literature](PopAgingMPtransmission_subsequent-literature.ipynb).*" + ] + } + ], + "metadata": { + "celltoolbar": "Slideshow", + "kernelspec": { + "display_name": ".venv-linux-x86_64", + "language": "python", + "name": "python3" + }, + "language_info": { + "codemirror_mode": { + "name": "ipython", + "version": 3 + }, + "file_extension": ".py", + "mimetype": "text/x-python", + "name": "python", + "nbconvert_exporter": "python", + "pygments_lexer": "ipython3", + "version": "3.12.3" + } + }, + "nbformat": 4, + "nbformat_minor": 2 +} \ No newline at end of file diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/index.md b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/index.md new file mode 100644 index 00000000..75cc951b --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/index.md @@ -0,0 +1,15 @@ +--- +title: "Population Aging and the Transmission of Monetary Policy to Consumption -- Ballpark Entry" +--- + +```{include} PopAgingMPtransmission_intro.ipynb +``` + +```{include} PopAgingMPtransmission_summary.ipynb +``` + +```{include} PopAgingMPtransmission_prior-literature.md +``` + +```{include} PopAgingMPtransmission_subsequent-literature.md +``` \ No newline at end of file diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/myst.yml b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/myst.yml new file mode 100644 index 00000000..e140b362 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/myst.yml @@ -0,0 +1,14 @@ +version: 1 +project: + title: "Population Aging and the Transmission of Monetary Policy to Consumption — Ballpark Entry" + bibliography: + - self.bib + - references.bib + - subsequent-literature.bib + toc: + - file: PopAgingMPtransmission_intro.ipynb + - file: PopAgingMPtransmission_prior-literature.ipynb + - file: PopAgingMPtransmission_summary.ipynb + - file: PopAgingMPtransmission_subsequent-literature.ipynb +site: + title: "Population Aging and the Transmission of Monetary Policy to Consumption — Ballpark Entry" \ No newline at end of file diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/proposed-revisions.md b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/proposed-revisions.md new file mode 100644 index 00000000..acc9240b --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/proposed-revisions.md @@ -0,0 +1,187 @@ +# Proposed Revisions to PopAgingMPtransmission.ipynb + +## Current Notebook Structure + +| Cell | Content | Type | +|------|---------|------| +| 0 | Title / author / date header | Markdown (HTML) | +| 1 | Overview (research question, Part I empirical, Part II model) | Markdown | +| 2 | Household's maximization problem | Markdown + LaTeX | +| 3 | Rent Case | Markdown + LaTeX | +| 4 | Own & No-adjust Case | Markdown + LaTeX | +| 5 | Own & Adjust Case | Markdown + LaTeX | +| 6 | Retirement and Death | Markdown + LaTeX | +| 7 | Results (brief bullet points) | Markdown | + +--- + +## Proposed Revised Structure + +The revised notebook should follow a more complete academic-presentation format: motivate the paper in its literature, present the model, show results, and then connect the work to the subsequent literature. Below is the proposed cell-by-cell layout with specific revisions. + +--- + +### Cell 0 — Title (minor edits) + +**Current issue:** The author's name is misspelled ("Arlene Wond" should be "Arlene Wong"). The date says "February 16, 2020" — update to reflect the revision date. + +**Proposed changes:** +- Fix author name: "Arlene Wong (2016)" +- Update the presenter date to the current revision date +- Optionally add a link to the published paper or working paper URL + +--- + +### NEW Cell 1 — Prior Literature Section (insert before current Cell 1) + +**Rationale:** The notebook currently jumps straight into the overview without any context for *why* this paper matters or what gap it fills. A prior-literature section frames the contribution. + +**Proposed content — "Prior Literature and Motivation":** + +- **Demographics and Macroeconomics (separate from monetary policy):** + Auerbach & Kotlikoff (1984, 1989), Abel (2002), and Ríos-Rull (1996, 2001) studied how demographics affect capital accumulation and asset prices, but did *not* connect demographics to monetary policy transmission. + +- **Household Heterogeneity and Monetary Policy (separate from demographics):** + Kaplan & Violante (2014) introduced "wealthy hand-to-mouth" households and showed balance-sheet heterogeneity matters for policy transmission. Auclert (2019) decomposed monetary transmission into income, wealth, and interest-rate-exposure channels. Neither paper connected these insights to population aging. + +- **Housing and Mortgage Channels:** + Mian, Rao, & Sufi (2013) demonstrated the connection between household balance sheets, housing wealth, and consumption. Hurst & Stafford (2004) and Bhutta & Keys (2016) documented the mortgage refinancing channel. Berger et al. (2018) studied housing wealth effects. These papers identified the channels but did not examine how they vary by age. + +- **Early Demographic-Monetary Policy Work:** + Imam (2015) and Juselius & Takáts (2015) began exploring whether demographics weaken monetary policy, but relied on reduced-form correlations without a structural micro-foundation. + +- **Wong's Contribution — The Gap She Filled:** + Wong (2016) was among the first to *explicitly link* population aging to monetary policy effectiveness through age-varying consumption responses, providing a structural, life-cycle micro-foundation showing *why* aging matters (younger households are borrowers with mortgages; older households hold interest-bearing assets). + +--- + +### Cell 2 — Overview (currently Cell 1, with enhancements) + +**Proposed changes:** +- Keep the existing bullet-point overview structure +- Add a brief paragraph or bullets at the top summarizing the paper's *main finding* in plain language: "An aging population dampens monetary policy transmission because older households are less responsive to interest rate changes, primarily due to lower mortgage exposure." +- Add a note about the two-part structure: empirical evidence first, then a structural model that rationalizes the empirical findings + +--- + +### Cells 3–7 — Model Presentation (currently Cells 2–6, with improvements) + +These cells present the core model and are mathematically sound. Proposed improvements: + +#### All model cells — Formatting cleanup +- Replace deprecated `` and `` HTML tags with proper Markdown/LaTeX formatting +- Use `$$...$$` display math blocks instead of wrapping LaTeX in HTML `` tags +- Use Markdown headers and bold text instead of HTML `` tags +- This will improve rendering consistency across Jupyter environments + +#### Cell 3 (Household's maximization problem) — Add intuition +- Before the math, add a short paragraph explaining the economic intuition: "The household faces a discrete choice each period among three options that differ in housing tenure and mortgage adjustment. This structure captures the key friction: adjusting housing/mortgage positions is costly, so many households are 'locked in' to existing mortgage terms." +- Define notation more explicitly (e.g., what $j$, $a$, $t$ index — cohort, age, time) + +#### Cell 4 (Rent Case) — Add intuition +- Add a brief note: "Renters have no housing wealth or mortgage debt. Their consumption responds to interest rates only through the savings channel." + +#### Cell 5 (Own & No-adjust Case) — Add intuition +- Add: "Homeowners who do not adjust continue paying their existing mortgage at the *original* contracted rate. This is the key friction — even when market rates fall, these households do not benefit until they refinance." +- Clarify what $M_{jat}$ represents (mortgage payment at the contracted rate) + +#### Cell 6 (Own & Adjust Case) — Add intuition +- Add: "When homeowners adjust, they pay a fixed cost $F$ but can refinance at the new market rate and resize their housing stock. This captures the refinancing channel — the mechanism through which monetary policy most strongly affects younger homeowners." +- Note the LTV constraint $b_{jat} \leq (1-\phi) p_t h_{jat}^{\text{own}}$ and its role + +#### Cell 7 (Retirement and Death) — Expand +- Add a note on how retirement changes the model: retirees receive pension/Social Security income instead of stochastic labor income +- Briefly note the bequest motive and its role in the model + +--- + +### Cell 8 — Results (currently Cell 7, significantly expanded) + +**Current issue:** The results section is only three bullet points and does not convey the paper's quantitative findings. + +**Proposed changes — expand to cover:** + +1. **Empirical Results (Part I):** + - Age-specific consumption elasticities: consumption of young households is 2–3× more responsive to interest rate shocks than that of older households + - Consumption elasticities decline monotonically with age + - The response is driven by *homeowners*, specifically through refinancing and new mortgage origination following rate declines + - Renters show much weaker consumption responses + +2. **Model Results (Part II):** + - The calibrated life-cycle model replicates the age-varying consumption elasticities + - The refinancing channel is quantitatively the most important transmission mechanism + - Counterfactual: shifting the age distribution toward older households (as projected by demographic trends) reduces the aggregate consumption response to monetary policy by a quantified amount + +3. **Policy Implications:** + - As populations age, central banks may need larger interest rate changes to achieve the same consumption stimulus + - The effectiveness of monetary policy is not constant — it depends on the demographic composition of the economy + +--- + +### NEW Cell 9 — Subsequent Literature Section (insert after Results) + +**Rationale:** Connecting the paper to subsequent research shows its influence and helps readers understand where the field has moved. + +**Proposed content — "Subsequent Literature and Research Directions":** + +1. **The Refinancing Channel — Deepened Understanding:** + - Di Maggio et al. (2017), Abel & Fuster (2021), Amromin, Bhutta, & Keys (2020) provided further empirical evidence on the refinancing channel's magnitude + - Eichenbaum, Rebelo, & Wong (2022) — a direct extension by Wong herself — showed that monetary policy effectiveness is *state-dependent*: it depends on the distribution of existing mortgage rates. When many households hold above-market rates, easing is powerful; after widespread refinancing, the channel is muted. + +2. **HANK Models Became the New Benchmark:** + - Kaplan, Moll, & Violante (2016) established that heterogeneous-agent models produce fundamentally different predictions about monetary transmission than representative-agent models + - Wong's work contributed to this shift by demonstrating that age-based heterogeneity (not just wealth heterogeneity) matters + +3. **Regional and Path-Dependent Heterogeneity:** + - Beraja, Fuster, Hurst, & Vavra (2019) showed the refinancing channel depends on local housing equity — regions with underwater mortgages cannot refinance even when rates fall + - Berger, Milbradt, Tourre, & Vavra (2021) showed path dependence: the history of interest rates shapes the current mortgage-rate distribution, creating time-varying policy effectiveness + +4. **Housing Market Design and Monetary Transmission:** + - Guren, Krishnamurthy, & McQuade (2018) and Greenwald (2016) examined how mortgage contract design (FRM vs. ARM, prepayment options) shapes transmission + - Policy debates about optimal mortgage market structure + +5. **Distributional Consequences:** + - Coibion et al. (2017) and the broader inequality literature examined how monetary policy affects different households differently + +--- + +### NEW Cell 10 — Open Questions and Future Directions + +**Rationale:** Pointing to remaining gaps helps position the notebook as a living research document and guides future work. + +**Proposed content — selected highlights from the gaps analysis:** + +- **International variation:** Almost all evidence is U.S.-specific. How do these mechanisms work in ARM-dominant markets (UK, Australia), covered-bond systems (Germany, Denmark), or developing economies with thin mortgage markets? +- **Rental markets:** The literature focuses on homeowners, but rising homeownership barriers mean large fractions of young households rent. How does monetary policy transmit to renters? +- **The unfinished aging agenda:** How will monetary policy effectiveness evolve as baby boomers decumulate assets? How do retirement timing decisions interact with policy? +- **Behavioral frictions:** Do inattention, procrastination, or financial illiteracy dampen the refinancing channel? +- **Long-run consequences:** How does monetary policy affect life-cycle wealth accumulation, cohort effects, and intergenerational transfers? + +--- + +### NEW Cell 11 — References + +**Rationale:** The notebook currently has no bibliography. A proper reference list improves academic credibility. + +**Proposed content:** A formatted bibliography of all papers cited in the notebook, including: +- Wong (2016) — the focal paper +- All prior-literature references (Kaplan & Violante 2014; Auclert 2019; Mian, Rao, & Sufi 2013; etc.) +- All subsequent-literature references (Eichenbaum, Rebelo, & Wong 2022; Beraja et al. 2019; Berger et al. 2021; etc.) + +--- + +## Summary of All Proposed Changes + +| Change | Location | Priority | +|--------|----------|----------| +| Fix author name typo ("Wond" → "Wong") | Cell 0 | High | +| Update date | Cell 0 | Low | +| **Add Prior Literature section** | **New Cell 1 (before Overview)** | **High** | +| Enhance Overview with plain-language summary | Cell 2 (old Cell 1) | Medium | +| Clean up HTML formatting → proper Markdown/LaTeX | Cells 3–7 | Medium | +| Add economic intuition before each model case | Cells 3–7 | Medium | +| Define notation explicitly | Cell 3 | Medium | +| **Significantly expand Results** | **Cell 8 (old Cell 7)** | **High** | +| **Add Subsequent Literature section** | **New Cell 9 (after Results)** | **High** | +| Add Open Questions / Future Directions | New Cell 10 | Medium | +| Add References / Bibliography | New Cell 11 | High | diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/references.bib b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/references.bib new file mode 100755 index 00000000..730f87b3 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/references.bib @@ -0,0 +1,1397 @@ +@ARTICLE{Krueger2002-bd, + title = "Does Income Inequality Lead to Consumption Inequality", + author = "Krueger, Dirk and Perri, Fabrizio", + journal = "Res. Pap. Econ. Fin.", + year = 2002 +} + +@ARTICLE{Sack2002-wq, + title = "The impact of monetary policy on asset prices", + author = "Sack, Brian P and Rigobon, Roberto", + journal = "SSRN Electron. J.", + publisher = "Elsevier BV", + year = 2002, + language = "en" +} + +@ARTICLE{Mitman2015-cq, + title = "Consumption and House Prices in the Great Recession: Model Meets + Evidence", + author = "Mitman, Kurt and Violante, Gianluca and Kaplan, Greg", + journal = "Res. Pap. Econ. Fin.", + year = 2015 +} + +@ARTICLE{Doepke2008-re, + title = "Financial Valuation and Risk Management Working Paper No . 448 + Inflation as a Redistribution Shock : Effects on Aggregates and + Welfare", + author = "Doepke, Matthias and Schneider, Martin", + year = 2008 +} + +@INCOLLECTION{Mussa2003-sq, + title = "Asset prices and monetary policy", + author = "Mussa, Michael", + booktitle = "Asset Price Bubbles", + publisher = "The MIT Press", + pages = "41--50", + month = jan, + year = 2003 +} + +@ARTICLE{Juselius2015-qy, + title = "Can demography affect inflation and monetary policy?", + author = "Juselius, M and Takáts, E", + journal = "ERN: Monetary Policy (Topic)", + month = feb, + year = 2015 +} + +@ARTICLE{Steinsson2014-wk, + title = "High frequency identification of monetary non-neutrality", + author = "Steinsson, Jon and Nakamura, Emi", + journal = "2014 Meeting Papers", + year = 2014 +} + +@ARTICLE{Evans2012-os, + title = "Macroeconomic Eects of {FOMC} Forward Guidance", + author = "Evans, Charles L and Justiniano, Alejandro", + year = 2012 +} + +@TECHREPORT{Agarwal2015-nn, + title = "Mortgage refinancing, consumer spending, and competition: + Evidence from the home affordable refinancing program", + author = "Agarwal, Sumit and Amromin, Gene and Chomsisengphet, Souphala + and Landvoigt, Tim and Piskorski, Tomasz and Seru, Amit and + Yao, Vincent", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + month = aug, + year = 2015 +} + +@TECHREPORT{Krueger2002-sk, + title = "Does income inequality lead to consumption inequality? Evidence + and theory", + author = "Krueger, Dirk and Perri, Fabrizio", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + month = sep, + year = 2002 +} + +@ARTICLE{Antonia2011-by, + title = "The user cost, home ownership and housing prices: Theory and + evidence from the {US} Article prepared for the International + Encyclopedia of Housing and Home by Elsevier, Section: + Economics/Finance", + author = "Antonia, D", + year = 2011 +} + +@ARTICLE{Gilchrist2014-zo, + title = "{NBER} {WORKING} {PAPER} {SERIES} {MONETARY} {POLICY} {AND} {REAL} + {BORROWING} {COSTS} {AT} {THE} {ZERO} {LOWER} {BOUND}", + author = "Gilchrist, Simon and López-Salido, D", + year = 2014 +} + +@ARTICLE{AmirUnknown-fa, + title = "Mit Sloan School of Management Mit Sloan School Working Paper + 4750-09 Systemic Risk and the Refinancing Ratchet Effect Systemic + Risk and the Refinancing Ratchet Effect *", + author = "{Amir} and Khandani, E and Lo, Andrew W and Merton, R C and + Khandani, A and Belton, Terry and Bhansali, V and Crum, Conan C and + Cummings, Jayna and Eikeboom, Arnout and Geltner, David and + Goetzmann, Will and Goldfield, Jacob and Golub, Ben and Jozoff, Matt + and Kennedy, Jim and Mian, Atif R and Sufi, Amir and Wheaton, Bill" +} + +@ARTICLE{Ho2013-wn, + title = "Insurer Competition and Negotiated Hospital Prices", + author = "Ho, Katherine and Lee, Robin S", + year = 2013 +} + +@TECHREPORT{Mian2014-wp, + title = "House price gains and {U}.s. household spending from 2002 to + 2006", + author = "Mian, Atif and Sufi, Amir", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + month = may, + year = 2014 +} + +@ARTICLE{Doepke2015-ts, + title = "Distributional effects of monetary policy", + author = "Doepke, Matthias and Schneider, Martin and Selezneva, V", + journal = "2015 Meeting Papers", + year = 2015 +} + +@ARTICLE{Ramcharan2015-cf, + title = "Monetary Policy Pass-Through: Household Consumption and Voluntary + Deleveraging", + author = "Ramcharan, Rodney and Kermani, Amir and Maggio, Marco Di", + journal = "2015 Meeting Papers", + year = 2015 +} + +@TECHREPORT{Auerbach1984-qt, + title = "Simulating alternative social security responses to the + demographic transition", + author = "Auerbach, Alan and Kotlikoff, Laurence", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + month = mar, + year = 1984 +} + +@ARTICLE{Coibion2015-jb, + title = "The cyclicality of sales, regular and effective prices: Business + cycle and policy implications", + author = "Coibion, Olivier and Gorodnichenko, Yuriy and Hong, Gee Hee", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 105, + number = 3, + pages = "993--1029", + abstract = "We study the cyclical properties of sales, regular price changes, + and average prices paid by consumers (“effective” prices) using + data on prices and quantities sold for numerous retailers across + many US metropolitan areas. Inflation in the effective prices + paid by consumers declines significantly with higher unemployment + while little change occurs in the inflation rate of prices posted + by retailers. This difference reflects the reallocation of + household expenditures across retailers, a feature of the data + which we document and quantify, rather than sales. We propose a + simple model with household store-switching and assess its + implications for business cycles and policymakers. (JEL D12, E31, + E32, L25, L81)", + month = mar, + year = 2015, + language = "en" +} + +@ARTICLE{Cloyne2020-ih, + title = "Monetary Policy when Households have Debt: New Evidence on the + Transmission Mechanism", + author = "Cloyne, James and Ferreira, Clodomiro and Surico, Paolo", + journal = "Rev. Econ. Stud.", + publisher = "Oxford University Press (OUP)", + volume = 87, + number = 1, + pages = "102--129", + abstract = "Abstract Using household survey data for the U.S. and the U.K., + we show that the aggregate response of consumption to interest + rate changes is driven by households with a mortgage. Outright + home-owners do not adjust expenditure at all while renters change + their spending but by less than mortgagors. Income rises for all + households as interest rate cuts directly affect firm investment + and household consumption, boosting aggregate demand. A crucial + difference between the housing tenure groups is the composition + of their balance sheets: mortgagors hold sizable illiquid assets + but little liquid wealth. Our results reveal that general + equilibrium effects on household income coupled with + balance-sheet-driven heterogeneity in the marginal propensity to + consume play a key role in the transmission of monetary policy.", + month = jan, + year = 2020, + language = "en" +} + +@ARTICLE{Auclert2019-dr, + title = "Monetary policy and the redistribution channel", + author = "Auclert, Adrien", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 109, + number = 6, + pages = "2333--2367", + abstract = "This paper evaluates the role of redistribution in the + transmission mechanism of monetary policy to consumption. Three + channels affect aggregate spending when winners and losers have + different marginal propensities to consume: an earnings + heterogeneity channel from unequal income gains, a Fisher channel + from unexpected inflation, and an interest rate exposure channel + from real interest rate changes. Sufficient statistics from + Italian and US data suggest that all three channels are likely to + amplify the effects of monetary policy. (JEL E21, E31, E43, E52)", + month = jun, + year = 2019, + language = "en" +} + +@ARTICLE{Sterk2018-av, + title = "The transmission of monetary policy through redistributions and + durable purchases", + author = "Sterk, Vincent and Tenreyro, Silvana", + journal = "J. Monet. Econ.", + publisher = "Elsevier BV", + volume = 99, + pages = "124--137", + abstract = "Using a tractable OLG model with government debt, we study a + redistribution channel for the transmission of monetary policy. + Expansionary open-market operations generate a negative wealth + effect, increasing households’ incentives to save and pushing + down the real interest rate. This leads to a substitution towards + durables, generating a temporary boom in the durable-good sector. + With search and matching frictions, the fall in interest rates + causes an increase in labor demand, raising aggregate employment. + The model mimics the empirical responses of key macroeconomic + variables to monetary policy interventions. The fiscal policy + stance plays a key role in the transmission mechanism.", + month = nov, + year = 2018, + language = "en" +} + +@ARTICLE{Berger2018-iz, + title = "House prices and consumer spending", + author = "Berger, David and Guerrieri, Veronica and Lorenzoni, Guido and + Vavra, Joseph", + journal = "Rev. Econ. Stud.", + publisher = "Oxford University Press (OUP)", + volume = 85, + number = 3, + pages = "1502--1542", + abstract = "Recent empirical work shows large consumption responses to house + price movements. This is at odds with a prominent theoretical + view which, using the logic of the permanent income hypothesis, + argues that consumption responses should be small. We show that, + in contrast to this view, workhorse models of consumption with + incomplete markets calibrated to rich cross-sectional micro facts + actually predict large consumption responses, in line with the + data. To explain this result, we show that consumption responses + to permanent house price shocks can be approximated by a simple + and robust rule-of-thumb formula: the marginal propensity to + consume out of temporary income times the value of housing. In + our model, consumption responses depend on a number of factors + such as the level and distribution of debt, the size and history + of house price shocks, and the level of credit supply. Each of + these effects is naturally explained with our simple formula.", + month = jul, + year = 2018, + language = "en" +} + +@TECHREPORT{Boar2017-ym, + title = "Liquidity constraints in the {U}.s. housing market", + author = "Boar, Corina and Gorea, Denis and Midrigan, Virgiliu", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + abstract = "We study the severity of liquidity constraints in the U.S. + housing market using a lifecycle model with uninsurable + idiosyncratic risks in which houses are illiquid, but agents + have the option to refinance their long-term mortgages or + extract home equity. The model reproduces well the distribution + of individual-level balance sheets – the fraction of housing, + mortgage debt and liquid assets in a household’s wealth, the + fraction of hand-to-mouth homeowners (Kaplan and Violante, + 2014), as the well as the frequency of housing turnover and + home equity extraction in the 2001 data. The model implies that + 75\% of homeowners are liquidity constrained and willing to pay + an average of 9 cents to extract an additional dollar of + liquidity from their home. Liquidity constraints imply sizable + welfare losses that amount to a 1.2\% permanent drop in + consumption, despite the relatively high frequency of home + equity extraction observed in the data.", + month = apr, + year = 2017 +} + +@ARTICLE{McKay2016-si, + title = "The power of forward guidance revisited", + author = "McKay, Alisdair and Nakamura, Emi and Steinsson, Jón", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 106, + number = 10, + pages = "3133--3158", + abstract = "In recent years, central banks have increasingly turned to + forward guidance as a central tool of monetary policy. Standard + monetary models imply that far future forward guidance has huge + effects on current outcomes, and these effects grow with the + horizon of the forward guidance. We present a model in which the + power of forward guidance is highly sensitive to the assumption + of complete markets. When agents face uninsurable income risk and + borrowing constraints, a precautionary savings effect tempers + their responses to changes in future interest rates. As a + consequence, forward guidance has substantially less power to + stimulate the economy. (JEL E21, E40, E50)", + month = oct, + year = 2016, + language = "en" +} + +@ARTICLE{Bhutta2016-uc, + title = "Interest rates and equity extraction during the housing boom", + author = "Bhutta, Neil and Keys, Benjamin J", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 106, + number = 7, + pages = "1742--1774", + abstract = "Credit record panel data from 1999–2010 indicates that the + likelihood of home equity extraction (borrowing, on average, + about \$40,000 against one's home) peaked in 2003 when mortgage + rates reached historic lows. We estimate a 27 percent rise in + extraction in response to a 100 basis point rate decline, and + that house price growth amplifies this relationship. Differential + responses to interest rates and home price appreciation by + borrower age and credit score provide new evidence of financial + frictions. Finally, equity extractions are associated with higher + default risk, consistent with the use of borrowed funds for + consumption or illiquid investment. (JEL D14, E43, E52, G12, R31)", + month = jul, + year = 2016, + language = "en" +} + +@ARTICLE{Kara2016-na, + title = "Interest rate effects of demographic changes in a New Keynesian + life-cycle framework", + author = "Kara, Engin and von Thadden, Leopold", + journal = "Macroecon. Dyn.", + publisher = "Cambridge University Press (CUP)", + volume = 20, + number = 1, + pages = "120--164", + abstract = "This paper develops a small-scale DSGE model that embeds a + demographic structure within a monetary policy framework. We + extend the nonmonetary overlapping-generations model of Gertler + and present a small synthesis model that combines the setup of + Gertler with a New Keynesian structure, implying that the + short-run dynamics related to monetary policy can be compared + with that of the standard New Keynesian model. In sum, the model + offers a New Keynesian platform that can be used to characterize + the response of macroeconomic variables to demographic shocks, + similarly to the responses to technology or monetary policy + shocks. We offer such characterizations for flexible and sticky + price equilibria. Empirically, we calibrate the model to + demographic developments projected for the euro area. The main + finding is that the projected slowdown in population growth and + the increase in longevity contribute slowly over time to a + decline in the equilibrium interest rate.", + month = jan, + year = 2016, + language = "en" +} + +@ARTICLE{Hurst2015-du, + title = "Regional redistribution through the {U}.s. mortgage market", + author = "Hurst, Erik and Keys, Benjamin J and Seru, Amit and Vavra, Joseph", + journal = "SSRN Electron. J.", + publisher = "Elsevier BV", + abstract = "Regional shocks are an important feature of the U.S. economy. + Households' ability to self-insure against these shocks depends + on how they affect local interest rates. In the U.S., most + borrowing occurs through the mortgage market and is influenced by + the presence of government-sponsored enterprises (GSEs). We + establish that despite large regional variation in predictable + default risk, GSE mortgage rates for otherwise identical loans do + not vary spatially. In contrast, the private market does set + interest rates which vary with local risk, and we postulate that + the lack of regional variation in GSE mortgage rates is likely + driven by political pressure. We use a spatial model of + collateralized borrowing to show that the national interest rate + policy substantially affects welfare by redistributing resources + across regions.", + year = 2015, + language = "en" +} + +@ARTICLE{Bhutta2013-fi, + title = "Interest rates and equity extraction during the housing boom", + author = "Bhutta, Neil and Keys, Benjamin J", + journal = "SSRN Electron. J.", + publisher = "Elsevier BV", + abstract = "Credit record panel data from 1999-2010 indicates that the + likelihood of home equity extraction (borrowing, on average, + about \$40,000 against one's home) peaked in 2003 when mortgage + rates reached historic lows. We estimate a 27 percent rise in + extraction in response to a 100 basis point rate decline, and + that house price growth amplifies this relationship. Differential + responses to interest rates and home price appreciation by + borrower age and credit score provide new evidence of financial + frictions. Finally, equity extractions are associated with higher + default risk, consistent with the use of borrowed funds for + consumption or illiquid investment.", + year = 2013 +} + +@ARTICLE{Karahan2015-km, + title = "What do data on millions of {U}.s. workers reveal about + life-cycle earnings risk?", + author = "Karahan, Fatih and Guvenen, Fatih and Ozkan, Serdar and Song, Jae", + journal = "SSRN Electron. J.", + publisher = "Elsevier BV", + abstract = "We study the evolution of individual labor earnings over the life + cycle using a large panel data set of earnings histories drawn + from U.S. administrative records. Using fully nonparametric + methods, our analysis reaches two broad conclusions. First, + earnings shocks display substantial deviations from + lognormality---the standard assumption in the incomplete markets + literature. In particular, earnings shocks display strong + negative skewness and extremely high kurtosis---as high as 30 + compared with 3 for a Gaussian distribution. The high kurtosis + implies that in a given year, most individuals experience very + small earnings shocks, and a small but non-negligible number + experience very large shocks. Second, these statistical + properties vary significantly both over the life cycle and with + the earnings level of individuals. We also estimate impulse + response functions of earnings shocks and find important + asymmetries: positive shocks to high-income individuals are quite + transitory, whereas negative shocks are very persistent; the + opposite is true for low-income individuals. Finally, we use + these rich sets of moments to estimate econometric processes with + increasing generality to capture these salient features of + earnings dynamics.", + year = 2015, + language = "en" +} + +@ARTICLE{Mian2015-ol, + title = "Foreclosures, house prices, and the real economy: Foreclosures, + house prices, and the real economy", + author = "Mian, Atif and Sufi, Amir and Trebbi, Francesco", + journal = "J. Finance", + publisher = "Wiley", + volume = 70, + number = 6, + pages = "2587--2634", + abstract = "ABSTRACTFrom 2007 to 2009, states without a judicial requirement + for foreclosures were twice as likely to foreclose on delinquent + homeowners. Analysis of borders of states with differing + foreclosure laws reveals a discrete jump in foreclosure + propensity as one enters nonjudicial states. Using state judicial + requirement as an instrument for foreclosures, we show that + foreclosures led to a large decline in house prices, residential + investment, and consumer demand from 2007 to 2009. As + foreclosures subsided from 2011 to 2013, the foreclosure rates in + nonjudicial and judicial requirement states converged and we find + some evidence of a stronger recovery in nonjudicial states.", + month = dec, + year = 2015, + language = "en" +} + +@ARTICLE{Beraja2015-ig, + title = "Regional heterogeneity and monetary policy", + author = "Beraja, Martin and Fuster, Andreas and Hurst, Erik and Vavra, + Joseph", + journal = "SSRN Electron. J.", + publisher = "Elsevier BV", + year = 2015 +} + +@ARTICLE{Juselius2015-dk, + title = "Can demography affect inflation and monetary policy?", + author = "Juselius, Mikael and Takáts, Előd", + publisher = "BIS Working paper", + abstract = "Several countries are concurrently experiencing historically low + inflation rates and ageing populations. Is there a connection, as + recently suggested by some senior central bankers? We undertake a + comprehensive test of this hypothesis in a panel of 22 countries + over the 1955-2010 period. We find a stable and significant + correlation between demography and low-frequency inflation. In + particular, a larger share of dependents (ie young and old) is + correlated with higher inflation, while a larger share of working + age cohorts is correlated with lower inflation. The results are + robust to different country samples, time periods, control + variables and estimation techniques. We also find a significant, + albeit unstable, relationship between demography and monetary + policy.", + year = 2015 +} + +@TECHREPORT{Eggertsson2014-to, + title = "A model of secular stagnation", + author = "Eggertsson, Gauti and Mehrotra, Neil", + publisher = "National Bureau of Economic Research", + address = "Cambridge, MA", + abstract = "We propose an overlapping generations New Keynesian model in + which a permanent (or very persistent) slump is possible without + any self- correcting force to full employment. The trigger for + the slump is a deleveraging shock, which creates an oversupply of + savings. Other forces that work in the same direction and can + both create or exacerbate the problem include a drop in + population growth, an increase in income inequality, and a fall + in the relative price of investment. Our model sheds light on the + long persistence of the Japanese crisis, the Great Depression, + and the slow recovery out of the Great Recession. It also + highlights several implications for policy.", + month = oct, + year = 2014 +} + +@ARTICLE{Landvoigt2015-mw, + title = "The housing market (s) of San Diego", + author = "Landvoigt, Tim and Piazzesi, Monika and Schneider, Martin", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 105, + number = 4, + pages = "1371--1407", + abstract = "This paper uses an assignment model to understand the cross + section of house prices within a metro area. Movers’ demand for + housing is derived from a life-cycle problem with credit market + frictions. Equilibrium house prices adjust to assign houses that + differ by quality to movers who differ by age, income, and + wealth. To quantify the model, we measure distributions of house + prices, house qualities, and mover characteristics from + micro-data on San Diego County during the 2000s boom. The main + result is that cheaper credit for poor households was a major + driver of prices, especially at the low end of the market. (JEL + D14, D91, R21, R31)", + month = apr, + year = 2015, + language = "en" +} + +@ARTICLE{Imam2015-ee, + title = "Shock from graying: Is the demographic shift weakening monetary + policy effectiveness: Shock of graying", + author = "Imam, Patrick A", + journal = "Int. J. Finance Econ.", + publisher = "Wiley", + volume = 20, + number = 2, + pages = "138--154", + abstract = "There is mounting evidence that in advanced economies, changes in + monetary policy have a more benign impact on the economy—given + better anchored inflation expectations and inflation being less + responsive to variation in unemployment—compared with the past. + We examine another aspect that could explain this empirical + finding, namely the demographic shift to an older society. The + paper first clarifies potential transmission channels that could + explain why monetary policy effectiveness may moderate in graying + societies. Then, using Bayesian estimation techniques for the + USA, Canada, Japan, the UK and Germany, a weakening of monetary + policy effectiveness over time with regard to unemployment and + inflation is confirmed. After proving the existence of a panel + co‐integration relationship between ageing and a weakening of + monetary policy, the study uses dynamic panel ordinary least + squares techniques to attribute this weakening of monetary policy + effectiveness to demographic changes. The paper concludes with + policy implications. Copyright © 2014 John Wiley \& Sons, Ltd.", + month = mar, + year = 2015, + language = "en" +} + +@TECHREPORT{Keys2014-wb, + title = "Mortgage rates, household balance sheets, and the real economy", + author = "Keys, Benjamin and Piskorski, Tomasz and Seru, Amit and Yao, + Vincent", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + month = oct, + year = 2014 +} + +@ARTICLE{Di-Maggio2014-rv, + title = "Monetary policy pass-through: Household consumption and voluntary + deleveraging", + author = "Di Maggio, Marco and Kermani, Amir and Ramcharan, Rodney", + journal = "SSRN Electron. J.", + publisher = "Elsevier BV", + abstract = "Do households bene…t from expansionary monetary policy? We + investigate how indebted households'consumption and saving + decisions are aected by anticipated changes in monthly interest + payments. We focus on borrowers with adjustable rate mortgages + originated between 2005 and 2007 featuring an automatic reset of + the interest rate after …ve years. The monthly payment due from + the average borrower falls by 52 percent ($900) upon reset, + resulting in an increase in disposable income totaling tens of + thousands of dollars over the remaining life of the mortgage. We + uncover three patterns. First, the average household increases + monthly car purchases by 40 percent ($150) upon reset. Second, + this expansionary eect is attenuated by the borrowers'voluntary + deleveraging, as a signi…cant fraction of the increased income is + deployed to accelerate debt repayment. Third, the marginal + propensity to consume is signi…cantly higher for low income and + underwater borrowers. To complement these household-level + …ndings, we employ county-level data to provide evidence that + consumption responded more to a reduction in short-term interest + rates in counties with a larger fraction of adjustable rate + mortgage debt. Our results shed light on the income channel of + monetary policy as well as the role of debt rigidity in reducing + the eectiveness of monetary policy.", + year = 2014, + language = "en" +} + +@ARTICLE{Guvenen2014-lo, + title = "Inferring Labor Income Risk and Partial Insurance from Economic + Choices", + author = "Guvenen, Fatih and Smith, Anthony A", + abstract = "This paper uses the information contained in the joint dynamics of + individuals' labor earnings and consumption‐choice decisions to + quantify both the amount of income risk that individuals face and + the extent to which they have access to informal insurance against + this risk. We accomplish this task by using indirect inference to + estimate a structural consumption–savings model, in which + individuals both learn about the nature of their income process + and partly insure shocks via informal mechanisms. In this + framework, we estimate (i) the degree of partial insurance, (ii) + the extent of systematic differences in income growth rates, (iii) + the precision with which individuals know their own income growth + rates when they begin their working lives, (iv) the persistence of + typical labor income shocks, (v) the tightness of borrowing + constraints, and (vi) the amount of measurement error in the data. + In implementing indirect inference, we find that an auxiliary + model that approximates the true structural equations of the model + (which are not estimable) works very well, with negligible small + sample bias. The main substantive findings are that income shocks + are moderately persistent, systematic differences in income growth + rates are large, individuals have substantial amounts of + information about their income growth rates, and about one‐half of + income shocks are smoothed via partial insurance. Putting these + findings together, the amount of uninsurable lifetime income risk + that individuals perceive is substantially smaller than what is + typically assumed in calibrated macroeconomic models with + incomplete markets.", + year = 2014 +} + +@ARTICLE{Gilchrist2015-er, + title = "Monetary policy and real borrowing costs at the zero lower bound", + author = "Gilchrist, Simon and López-Salido, David and Zakrajšek, Egon", + journal = "Am. Econ. J. Macroecon.", + publisher = "American Economic Association", + volume = 7, + number = 1, + pages = "77--109", + month = jan, + year = 2015 +} + +@ARTICLE{Khandani2013-kc, + title = "Systemic risk and the refinancing ratchet effect", + author = "Khandani, Amir E and Lo, Andrew W and Merton, Robert C", + journal = "J. Financ. Econ.", + publisher = "Elsevier BV", + volume = 108, + number = 1, + pages = "29--45", + abstract = "The combination of rising home prices, declining interest rates, + and near-frictionless refinancing opportunities can create + unintentional synchronization of homeowner leverage, leading to a + “ratchet” effect on leverage because homes are indivisible and + owner-occupants cannot raise equity to reduce leverage when home + prices fall. Our simulation of the U.S. housing market yields + potential losses of $1.7 trillion from June 2006 to December 2008 + with cash-out refinancing vs. only $330 billion in the absence of + cash-out refinancing. The refinancing ratchet effect is a new + type of systemic risk in the financial system and does not rely + on any dysfunctional behaviors.", + month = apr, + year = 2013, + language = "en" +} + +@ARTICLE{Kaplan2014-ee, + title = "A Model of the Consumption Response to Fiscal Stimulus Payments", + author = "Kaplan, Greg and Violante, Giovanni L", + journal = "Econometrica", + abstract = "A wide body of empirical evidence, based on randomized + experiments, finds that 20-40 percent of fiscal stimulus payments + (e.g. tax rebates) are spent on non-durable household consumption + in the quarter that they are received. We develop a structural + economic model to interpret this evidence. Our model integrates + the classical Baumol-Tobin model of money demand into the + workhorse incomplete-markets life-cycle economy. In this + framework, households can hold two assets: a low-return liquid + asset (e.g., cash, checking account) and a high-return illiquid + asset (e.g., housing, retirement account) that carries a + transaction cost. The optimal life-cycle pattern of wealth + accumulation implies that many households are ``wealthy + hand-to-mouth'': they hold little or no liquid wealth despite + owning sizable quantities of illiquid assets. They therefore + display large propensities to consume out of additional income. We + document the existence of such households in data from the Survey + of Consumer Finances. A version of the model parametrized to the + 2001 tax rebate episode is able to generate consumption responses + to fiscal stimulus payments that are in line with the data.", + year = 2014 +} + +@ARTICLE{Alvarez2012-gi, + title = "Durable consumption and asset management with transaction and + observation costs", + author = "Alvarez, Fernando and Guiso, Luigi and Lippi, Francesco", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 102, + number = 5, + pages = "2272--2300", + abstract = "The empirical evidence on rational inattention lags the + theoretical developments: micro evidence on one of the most + immediate consequences of observation costs––the infrequent + observation of state variables––is not available in standard + datasets. We contribute to filling the gap using new household + surveys. To match these data we modify existing models, shifting + the focus from nondurable to durable consumption. The model + features both observation and transaction costs and implies a + mixture of time-dependent and state-dependent rules. Numerical + simulations explain the frequencies of trading and observation of + the median investor with small observation costs and larger + transaction costs. (JEL D12, D14, E21, G11)", + month = aug, + year = 2012, + language = "en" +} + +@ARTICLE{Mian2013-wr, + title = "Household balance sheets, consumption, and the economic slump", + author = "Mian, Atif and Rao, Kamalesh and Sufi, Amir", + journal = "Q. J. Econ.", + publisher = "Oxford University Press (OUP)", + volume = 128, + number = 4, + pages = "1687--1726", + abstract = "Abstract We investigate the consumption consequences of the + 2006–9 housing collapse using the highly unequal geographic + distribution of wealth losses across the United States. We + estimate a large elasticity of consumption with respect to + housing net worth of 0.6 to 0.8, which soundly rejects the + hypothesis of full consumption risk-sharing. The average marginal + propensity to consume (MPC) out of housing wealth is 5–7 cents + with substantial heterogeneity across ZIP codes. ZIP codes with + poorer and more levered households have a significantly higher + MPC out of housing wealth. In line with the MPC result, ZIP codes + experiencing larger wealth losses, particularly those with poorer + and more levered households, experience a larger reduction in + credit limits, refinancing likelihood, and credit scores. Our + findings highlight the role of debt and the geographic + distribution of wealth shocks in explaining the large and unequal + decline in consumption from 2006 to 2009.", + month = nov, + year = 2013, + language = "en" +} + +@ARTICLE{Abel2013-hc, + title = "{OPTIMAL} {INATTENTION} {TO} {THE} {STOCK} {MARKET} {WITH} + {INFORMATION} {COSTS} {AND} {TRANSACTIONS} {COSTS}", + author = "Abel, Andrew B and Eberly, Janice C and Panageas, Stavros", + journal = "Econometrica", + abstract = "Recurrent intervals of inattention to the stock market are optimal + if consumers incur a utility cost to observe asset values. When + consumers observe the value of their wealth, they decide whether + to transfer funds between a transactions account from which + consumption must be financed and an investment portfolio of equity + and riskless bonds. Transfers of funds are subject to a + transactions cost that reduces wealth and consists of two + components: one is proportional to the amount of assets + transferred, and the other is a fixed resource cost. Because it is + costly to transfer funds, the consumer may choose not to transfer + any funds on a particular observation date. In general, the + optimal adjustment rule—including the size and direction of + transfers, and the time of the next observation—is + state-dependent. Surprisingly, unless the fixed resource cost of + transferring funds is large, the consumer’s optimal behavior + eventually evolves to a situation with a purely time-dependent + rule with a constant interval of time between observations. This + interval of time can be substantial even for tiny observation + costs. When this situation is attained, the standard consumption + Euler equation holds between observation dates if the consumer is + sufficiently risk averse.", + year = 2013 +} + +@ARTICLE{Einav2010-jg, + title = "Recording discrepancies in Nielsen Homescan data: Are they + present and do they matter?", + author = "Einav, Liran and Leibtag, Ephraim and Nevo, Aviv", + journal = "Quant. Mark. Econ.", + publisher = "Springer Science and Business Media LLC", + volume = 8, + number = 2, + pages = "207--239", + month = jun, + year = 2010, + language = "en" +} + +@TECHREPORT{Doepke2006-bd, + title = "Inflation as a redistribution shock: Effects on aggregates and + welfare", + author = "Doepke, Matthias and Schneider, Martin", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + abstract = "Episodes of unanticipated inflation reduce the real value of + nominal claims and thus redistribute wealth from lenders to + borrowers. In this study, we consider redistribution as a + channel for aggregate and welfare effects of inflation. We + model an inflation episode as an unanticipated shock to the + wealth distribution in a quantitative overlapping-generations + model of the U.S. economy. While the redistribution shock is + zero sum, households react asymmetrically, mostly because + borrowers are younger on average than lenders. As a result, + inflation generates a decrease in labour supply as well as an + increase in savings. Even though inflation-induced + redistribution has a persistent negative effect on output, it + improves the weighted welfare of domestic households.", + month = jun, + year = 2006 +} + +@ARTICLE{Fujiwara2008-fj, + title = "A dynamic new Keynesian life-cycle model: Societal aging, + demographics, and monetary policy", + author = "Fujiwara, Ippei and Teranishi, Yuki", + journal = "J. Econ. Dyn. Control", + publisher = "Elsevier BV", + volume = 32, + number = 8, + pages = "2398--2427", + abstract = "In this paper, we first construct a dynamic new Keynesian model + that incorporates life-cycle behavior a la Gertler [1999. + Government debt and social security in a life-cycle economy. + Carnegie–Rochester Conference Series on Public Policy 50, + 61–110], in order to study whether structural shocks to the + economy have asymmetric effects on heterogeneous agents, namely + workers and retirees. We also examine whether considerations of + life-cycle and demographic structure alter the dynamic properties + of the monetary business cycle model, specifically the degree of + amplification in impulse responses. According to our simulation + results, shocks indeed have asymmetric impacts on different + households and the demographic structure does alter the size of + responses against shocks by changing the trade-off between + substitution and income effects.", + month = aug, + year = 2008, + language = "en" +} + +@TECHREPORT{Aguiar2008-zn, + title = "Deconstructing Lifecycle Expenditure", + author = "Aguiar, Mark and Hurst, Erik", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + abstract = "In this paper we revisit two well-known facts regarding + lifecycle expenditures. The first is the familiar ``hump'' + shaped lifecycle profile of nondurable expenditures. We + document that the behavior of total nondurables masks + surprising heterogeneity in the lifecycle profile of individual + sub-components. We find, for example, that while food + expenditures decline after middle age, expenditures on + entertainment continue to increase throughout the lifecycle. + These patterns pose a challenge to models that emphasize + inter-temporal substitution or movements in income, including + standard models of precautionary savings, myopia, and limited + commitment, to explain the lifecycle profile of expenditures. + Second, we document that the increase in the cross-sectional + dispersion of expenditure over the lifecycle is not greater for + luxuries. In particular, the dispersion in entertainment + expenditure declines relative to food expenditures as + households become older, casting further doubt on theories that + emphasize (exclusively) shocks to permanent income to explain + the rising cross sectional expenditure dispersion over the + lifecycle. We propose and test a Beckerian model that + emphasizes intra-temporal substitution between time and + expenditures as the opportunity cost of time varies over the + lifecycle. We find this alternative model successfully explains + the joint behavior of food and entertainment expenditures in + the latter half of the lifecycle. The model, however, is less + successful in explaining expenditure patterns early in the + lifecycle.", + month = mar, + year = 2008 +} + +@ARTICLE{Doepke2006-ke, + title = "Aggregate implications of wealth redistribution: The case of + inflation", + author = "Doepke, Matthias and Schneider, Martin", + journal = "J. Eur. Econ. Assoc.", + publisher = "Oxford University Press (OUP)", + volume = 4, + number = "2-3", + pages = "493--502", + month = may, + year = 2006, + language = "en" +} + +@ARTICLE{Cocco2005-ub, + title = "Consumption and portfolio choice over the life cycle", + author = "Cocco, João F and Gomes, Francisco J and Maenhout, Pascal J", + journal = "Rev. Financ. Stud.", + publisher = "Oxford University Press (OUP)", + volume = 18, + number = 2, + pages = "491--533", + abstract = "This article solves a realistically calibrated life cycle model + of consumption and portfolio choice with non-tradable labor + income and borrowing constraints. Since labor income substitutes + for riskless asset holdings, the optimal share invested in + equities is roughly decreasing over life. We compute a measure of + the importance of human capital for investment behavior. We find + that ignoring labor income generates large utility costs, while + the cost of ignoring only its risk is an order of magnitude + smaller, except when we allow for a disastrous labor income + shock. Moreover, we study the implications of introducing + endogenous borrowing constraints in this incomplete-markets + setting. Copyright 2005, Oxford University Press.", + year = 2005, + language = "en" +} + +@ARTICLE{Hurst2004-cu, + title = "Home is where the equity is: Mortgage refinancing and household + consumption", + author = "Hurst, Erik and Stafford, Frank P", + journal = "J. Money Credit Bank.", + publisher = "Johns Hopkins University Press", + volume = 36, + number = 6, + pages = "985--1014", + abstract = "Applying a permanent income model with exogenous liquidity + constraints and mortgage behavior, household refinancing when + mortgage interest rates are historically high and rising, a + persistent empirical puzzle, is explained. Using data from the + Panel Study of Income Dynamics, households experiencing an + unemployment shock and having limited initial liquid assets to + draw upon are shown to have been 25\% more likely to refinance, + 1991-94. On average, such liquidity-constrained households + converted over two-thirds of every dollar of equity they removed + into current consumption as mortgage rates plummeted, 1991-94, + producing an estimated expenditure stimulus of at least \$28 + billion.", + year = 2004 +} + +@ARTICLE{Campbell2003-qk, + title = "Household risk management and optimal mortgage choice", + author = "Campbell, J Y and Cocco, J F", + journal = "Q. J. Econ.", + publisher = "Oxford University Press (OUP)", + volume = 118, + number = 4, + pages = "1449--1494", + month = nov, + year = 2003, + language = "en" +} + +@ARTICLE{Abel2003-js, + title = "The effects of a baby boom on stock prices and capital + accumulation in the presence of social security", + author = "Abel, Andrew B", + journal = "Econometrica", + publisher = "The Econometric Society", + volume = 71, + number = 2, + pages = "551--578", + month = mar, + year = 2003, + language = "en" +} + +@ARTICLE{Kuttner2001-uq, + title = "Monetary policy surprises and interest rates: Evidence from the + Fed funds futures market", + author = "Kuttner, Kenneth N", + journal = "J. Monet. Econ.", + publisher = "Elsevier BV", + volume = 47, + number = 3, + pages = "523--544", + abstract = "This paper estimates the impact of monetary policy actions on + bill, note, and bond yields, using data from the futures market + for Federal funds to separate changes in the target funds rate + into anticipated and unanticipated components. Interest rates’ + response to anticipated target rate changes is small, while their + response to unanticipated changes is large and highly + significant. These responses are generally consistent with the + expectations hypothesis of the term structure. Surprise target + rate changes have little effect on expectations of future + actions, however, which helps to explain the lack of empirical + support for the expectations hypothesis at the short end of the + yield curve.", + month = jun, + year = 2001, + language = "en" +} + +@ARTICLE{Floden2001-vb, + title = "Idiosyncratic risk in the United States and Sweden: Is there a + role for government insurance?", + author = "Floden, Martin and Lindé, Jesper", + journal = "Rev. Econ. Dyn.", + publisher = "Elsevier BV", + volume = 4, + number = 2, + pages = "406--437", + month = apr, + year = 2001, + language = "en" +} + +@ARTICLE{Rios-Rull2001-fa, + title = "Population changes and capital accumulation: The aging of the + baby boom", + author = "Ríos-Rull, José-Víctor", + journal = "Top. Macroecon.", + publisher = "Walter de Gruyter GmbH", + volume = 1, + number = 1, + abstract = "Abstract In this paper I explore the quantitative implications + for savings of population aging. In doing so, I pay particular + attention to some features that have been partially over-looked + in the literature. These features include the details of the + population aging process, the initial conditions with respect to + assets holdings, and the relation between age and household size. + In order to do so, I develop recursive methods capable of dealing + with overlapping generations environments where the population is + stochastic. The main findings are: i) If population patterns + revert to the averages of the last 50 years, the reduction in + aggregate savings due to changes in the age structure of the + population is small. ii) If, however, the demographic process is + such that fertility patterns remain at their current low levels, + then the effects of the aging of the baby boom are very large. + iii) Initial conditions matter: both the choice for initial + assets and the choice for the mechanism through which current + fertility reverts to its long run average have implications for + the economic allocations. And iv) The contribution of general + equilibrium effects is to exacerbate the reduction of savings + since population aging tends to make labor relatively scarce, + and, therefore, to reduce rates of return of capital, which in + turn reduces savings even further.", + month = nov, + year = 2001, + language = "en" +} + +@TECHREPORT{Kennedy1998-wf, + title = "Asset prices and monetary policy", + author = "Kennedy, M and Palerm, Á and Pigott, Charles A and Terribile, F", + publisher = "Organisation for Economic Co-Operation and Development (OECD)", + series = "OECD Economics Department Working Papers", + month = feb, + year = 1998 +} + +@ARTICLE{Rios-Rull1996-jp, + title = "Life-cycle economies and aggregate fluctuations", + author = "Rios-Rull, Jose-Victor", + journal = "Rev. Econ. Stud.", + publisher = "Oxford University Press (OUP)", + volume = 63, + number = 3, + pages = 465, + abstract = "Do the implications for business cycle issues change when we + switch from studying infinitely-lived, representative-agent + models to more sophisticated demographic structures with finitely + lived agents? This article addresses that question by using a + large, overlapping-generations model that is calibrated to U.S. + demographic properties, microeconomic evidence, and National + Income and Product Accounts. The finding is that the answers + obtained are basically the same for the two kinds of models. The + article also explores the relative volatility of hours across age + groups, an issue that cannot be addressed by using the + infinitely-lived, representative-agent abstraction.", + month = jul, + year = 1996 +} + +@TECHREPORT{Auerbach1989-nb, + title = "The economic dynamics of an ageing population: The case of four + {OECD} countries", + author = "Auerbach, A and Kotlikoff, L and Hagemann, R and Nicoletti, G", + publisher = "Organisation for Economic Co-Operation and Development (OECD)", + series = "OECD Economics Department Working Papers", + month = jan, + year = 1989 +} + +@TECHREPORT{Auerbach1989-zm, + title = "The economic dynamics of an ageing population: The case of four + {OECD} countries", + author = "Auerbach, Alan J and Kotlikoff, Laurence J and Hagemann, Robert P + and Nicoletti, Giuseppe", + publisher = "Organisation for Economic Co-Operation and Development (OECD)", + series = "OECD Economics Department Working Papers", + month = jan, + year = 1989 +} + +@TECHREPORT{Clark1980-dg, + title = "Demographic differences in cyclical employment variation", + author = "Clark, Kim and Summers, Lawrence", + publisher = "National Bureau of Economic Research", + institution = "National Bureau of Economic Research", + address = "Cambridge, MA", + abstract = "Demographic differences in patterns of employment variation + over the business cycle are examined in this paper. Three + primary conclusions emerge. First, both participation and + unemployment must be considered in any analysis of cyclical + changes in the labor market. Second, young people bear a + disproportionate share of cyclical employment variation. Third, + failure to consider participation has led to undue pessimism + about the effect of aggregate demand policy on high + unemployment groups. If participation did not surge, reduction + in overall unemployment to its 1969 level would reduce the + unemployment of almost all demographic groups to very low + levels.", + month = jul, + year = 1980 +} + +@ARTICLE{Auerbach1985-ud, + title = "Simulating alternative social security responses to the + demographic transition", + author = "Auerbach, A J and Kotlikoff, L J", + journal = "Natl. Tax J.", + publisher = "University of Chicago Press", + volume = 38, + number = 2, + pages = "153--168", + abstract = "``This paper uses a perfect foresight life cycle simulation model + to examine the dynamic economic effects of baby 'booms' and baby + 'busts' as well as the interaction of such demographic changes + with social security policy. Demographic change can have sizeable + short and long-run effects on saving rates and factors returns.'' + The geographic focus is on the United States. ``The model + predicts long-run improvement in welfare associated with a + prolonged baby bust. This improvement holds even in the absence + of accommodating social security policy. It reflects a long-run + decline in the dependency ratio, with the reduction in dependent + children per worker more than offsetting the increase in retirees + per worker.''", + month = jun, + year = 1985, + keywords = "Americas; Baby Boom; Baby Bust; Cyclic Analysis; Demographic + Effectiveness; Demographic Factors; Dependency Burden; Developed + Countries; Developing Countries; Economic Factors; Family + Planning; Family Planning Program Evaluation; Family Planning + Programs; Fertility; Financial Activities; Financing, Government; + Microeconomic Factors; Models, Theoretical; North America; + Northern America; Policy; Population; Population Dynamics; Social + Policy; Social Security; Social Welfare; Socioeconomic Factors; + United States", + language = "en" +} + +@ARTICLE{Clark1981-qa, + title = "Demographic differences in cyclical employment variation", + author = "Clark, Kim B and Summers, Lawrence H", + journal = "J. Hum. Resour.", + publisher = "JSTOR", + volume = 16, + number = 1, + pages = 61, + abstract = "Demographic differences in patterns of employment variation over + the business cycle are examined in this paper. Three primary + conclusions emerge. First, both participation and unemployment + must be considered in any analysis of cyclical changes in the + labor market. Second, young people bear a disproportionate share + of cyclical employment variation. Third, failure to consider + participation has led to undue pessimism about the effect of + aggregate demand policy on high unemployment groups. If + participation did not surge, reduction in overall unemployment to + its 1969 level would reduce the unemployment of almost all + demographic groups to very low levels.", + year = 1981 +} + +@ARTICLE{Gertler2015-ox, + title = "Monetary policy surprises, credit costs, and economic activity", + author = "Gertler, Mark and Karadi, Peter", + journal = "Am. Econ. J. Macroecon.", + publisher = "American Economic Association", + volume = 7, + number = 1, + pages = "44--76", + month = jan, + year = 2015 +} + +@ARTICLE{Rigobon2002-ia, + title = "The impact of monetary policy on asset prices", + author = "Rigobon, Roberto and Sack, Brian", + journal = "Fin. Econ. Discuss. Ser.", + publisher = "Board of Governors of the Federal Reserve System", + volume = "2002.0", + number = 4, + pages = "1--34", + abstract = "Estimating the response of asset prices to changes in monetary + policy is complicated by the endogeneity of policy decisions and + the fact that both interest rates and asset prices react to + numerous other variables. This paper develops a new estimator + that is based on the heteroskedasticity that exists in high + frequency data. We show that the response of asset prices to + changes in monetary policy can be identified based on the + increase in the variance of policy shocks that occurs on days of + FOMC meetings and of the Chairman's semi-annual monetary policy + testimony to Congress. The identification approach employed + requires a much weaker set of assumptions than needed under the + ``event-study'' approach that is typically used in this context. + The results indicate that an increase in short-term interest + rates results in a decline in stock prices and in an upward shift + in the yield curve that becomes smaller at longer maturities.", + year = 2002 +} + +@ARTICLE{Hurst2016-ff, + title = "Regional redistribution through the {US} mortgage market", + author = "Hurst, Erik and Keys, Benjamin J and Seru, Amit and Vavra, Joseph", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 106, + number = 10, + pages = "2982--3028", + abstract = "Regional shocks are an important feature of the US economy. + Households' ability to self-insure against these shocks depends + on how they affect local interest rates. In the United States, + most borrowing occurs through the mortgage market and is + influenced by the presence of government-sponsored enterprises + (GSE). We establish that despite large regional variation in + predictable default risk, GSE mortgage rates for otherwise + identical loans do not vary spatially. In contrast, the private + market does set interest rates which vary with local risk. We use + a spatial model of collateralized borrowing to show that the + national interest rate policy substantially affects welfare by + redistributing resources across regions. (JEL E32, E43, G21, G28, + L32, R11, R31)", + month = oct, + year = 2016, + language = "en" +} + +@ARTICLE{Gorodnichenko2016-xk, + title = "Are sticky prices costly? Evidence from the stock market", + author = "Gorodnichenko, Yuriy and Weber, Michael", + journal = "Am. Econ. Rev.", + publisher = "American Economic Association", + volume = 106, + number = 1, + pages = "165--199", + abstract = "We show that after monetary policy announcements, the conditional + volatility of stock market returns rises more for firms with + stickier prices than for firms with more flexible prices. This + differential reaction is economically large and strikingly robust + to a broad array of checks. These results suggest that menu + costs—broadly defined to include physical costs of price + adjustment, informational frictions, etc.—are an important factor + for nominal price rigidity at the micro level. We also show that + our empirical results are qualitatively and, under plausible + calibrations, quantitatively consistent with New Keynesian + macroeconomic models in which firms have heterogeneous price + stickiness. (JEL E12, E31, E43, E44, E52, G12, L11)", + month = jan, + year = 2016, + language = "en" +} + +@ARTICLE{Gorodnichenko2013-yh, + title = "Are sticky prices costly? Evidence from the stock market", + author = "Gorodnichenko, Yuriy and Weber, Michael", + journal = "SSRN Electron. J.", + publisher = "Elsevier BV", + year = 2013, + language = "en" +} + +@ARTICLE{Meh2011-xp, + title = "Inflation, nominal portfolios, and wealth redistribution in + Canada: Inflation, nominal portfolios, and wealth redistribution", + author = "Meh, Césaire A and Terajima, Yaz", + journal = "Can. J. Econ.", + publisher = "Wiley", + volume = 44, + number = 4, + pages = "1369--1402", + abstract = "Abstract This paper quantifies the redistributional effects of + inflation in Canada that arise through the revaluation of nominal + assets and liabilities. We find that the effects are non‐trivial + even for low inflation episodes. The main winners are young, + middle‐class households with mortgage debt. The government + receives a windfall gain from its long‐term debt. The old, the + rich or the middle‐aged, middle‐class lose, largely owing to + their holdings of bonds and non‐indexed defined benefit pension + assets. Finally, our Canada‐U.S. comparison reveals that the + extent of redistributions can be quite different even between + countries of similar economic and legal environments.", + month = nov, + year = 2011, + language = "en" +} + +@ARTICLE{Saiz2010-wx, + title = "The geographic determinants of housing {supply}$^{*}$", + author = "Saiz, Albert", + journal = "Q. J. Econ.", + publisher = "Oxford University Press (OUP)", + volume = 125, + number = 3, + pages = "1253--1296", + month = aug, + year = 2010, + language = "en" +} + +@ARTICLE{Alvarez2009-ot, + title = "Financial Innovation and the Transactions Demand for Cash", + author = "Alvarez, Fernando and Lippi, Francesco", + journal = "Econometrica", + abstract = "We document cash management patterns for households that are at + odds with the predictions of deterministic inventory models that + abstract from precautionary motives. We extend the Baumol-Tobin + cash inventory model to a dynamic environment that allows for the + possibility of withdrawing cash at random times at a low cost. + This modification introduces a precautionary motive for holding + cash and naturally captures developments in withdrawal technology, + such as the increasing diffusion of bank branches and ATM + terminals. We characterize the solution of the model and show that + qualitatively it is able to reproduce the empirical patterns. + Estimating the structural parameters we show that the model + quantitatively accounts for key features of the data. The + estimates are used to quantify the expenditure and interest rate + elasticity of money demand, the impact of financial innovation on + money demand, the welfare cost of inflation, the gains of + disinflation and the benefit of ATM ownership.", + year = 2009 +} + +@ARTICLE{Chen2020-uw, + title = "Houses as {ATMs}: Mortgage refinancing and macroeconomic + uncertainty", + author = "Chen, Hui and Michaux, Michael and Roussanov, Nikolai", + journal = "J. Finance", + publisher = "Wiley", + volume = 75, + number = 1, + pages = "323--375", + abstract = "ABSTRACTMortgage refinancing activity associated with extraction + of home equity contains a strongly countercyclical component + consistent with household demand for liquidity. We estimate a + structural model of liquidity management featuring + countercyclical idiosyncratic labor income uncertainty, long‐ and + short‐term mortgages, and realistic borrowing constraints. We + empirically evaluate its predictions for households' choices of + leverage, liquid assets, and mortgage refinancing using + microlevel data. Taking the observed historical paths of house + prices, aggregate income, and interest rates as given, the model + accounts for many salient features in the evolution of balance + sheets and consumption in the cross‐section of households over + 2001 to 2012.", + month = feb, + year = 2020, + language = "en" +} diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/self.bib b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/self.bib new file mode 100644 index 00000000..22ea1fa9 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/self.bib @@ -0,0 +1,7 @@ +@ARTICLE{Wong2016-ud, + title = "Population aging and the transmission of monetary policy to + consumption", + author = "Wong, Arlene", + journal = "Res. Pap. Econ. Fin.", + year = 2016 +} \ No newline at end of file diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/source/arlene_wong_jmp_latest.pdf b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/source/arlene_wong_jmp_latest.pdf new file mode 100755 index 00000000..9d9abc63 Binary files /dev/null and b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/source/arlene_wong_jmp_latest.pdf differ diff --git a/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/subsequent-literature.bib b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/subsequent-literature.bib new file mode 100755 index 00000000..a316c319 --- /dev/null +++ b/models/We-Would-Like-In-Econ-ARK/PopAgingMPtransmission/subsequent-literature.bib @@ -0,0 +1,213 @@ +% Exported from Litmaps (https://www.litmaps.com) + +@article{monetary_kaplan_2016, + title = {Monetary Policy According to HANK}, + doi = {10.1257/aer.20160042}, + author = {Kaplan, Greg and Moll, Benjamin and Violante, G.}, + journal = {Social Science Research Network}, + year = {2016}, + litmapsId = {276769707} +} + + +@article{statedependent_eichenbaum_2022, + title = {State-Dependent Effects of Monetary Policy: The Refinancing Channel}, + doi = {10.1257/aer.20191244}, + author = {Eichenbaum, M. and Rebelo, Sergio and Wong, Arlene}, + journal = {American Economic Review}, + year = {2022}, + litmapsId = {214461554} +} + + +@article{refinancing_amromin_2020, + title = {Refinancing, Monetary Policy, and the Credit Cycle}, + doi = {10.1146/annurev-financial-012720-120430}, + author = {Amromin, Gene and Bhutta, Neil and Keys, Benjamin J.}, + journal = {Annual Review of Financial Economics}, + year = {2020}, + litmapsId = {278555928} +} + + +@article{population_wong_2016, + title = {Population aging and the transmission of monetary policy to consumption}, + author = {Wong, Arlene}, + journal = {Research Papers in Economics}, + year = {2016}, + litmapsId = {48123013} +} + + +@article{population_wong_2016, + title = {Population aging and the transmission of monetary policy to consumption}, + author = {Wong, Arlene}, + journal = {Research Papers in Economics}, + year = {2016}, + litmapsId = {48123013} +} + + +@article{innocent_coibion_2017, + title = {Innocent Bystanders? Monetary policy and inequality}, + doi = {10.1016/j.jmoneco.2017.05.005}, + author = {Coibion, Olivier and Gorodnichenko, Yuriy and Kueng, Lorenz and Silvia, John}, + journal = {Journal of Monetary Economics}, + year = {2017}, + litmapsId = {40685273} +} + + +@article{house_berger_2018, + title = {House Prices and Consumer Spending}, + doi = {10.1093/restud/rdx060}, + author = {Berger, David and Guerrieri, Veronica and Lorenzoni, Guido and Vavra, Joseph}, + journal = {The Review of Economic Studies}, + year = {2018}, + litmapsId = {98557575} +} + + +@article{regional_beraja_2019, + title = {Regional Heterogeneity and the Refinancing Channel of Monetary Policy*}, + doi = {10.1093/qje/qjy021}, + author = {Beraja, Martin and Fuster, Andreas and Hurst, Erik and Vavra, Joseph}, + journal = {Quarterly Journal of Economics}, + year = {2019}, + litmapsId = {169209569} +} + + +@article{houses_chen_2020, + title = {Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty}, + doi = {10.1111/jofi.12842}, + author = {Chen, Hui and Michaux, Michael and Roussanov, Nikolai}, + journal = {Journal of Finance}, + year = {2020}, + litmapsId = {164351263} +} + + +@article{nber_eichenbaum_2018, + title = {NBER WORKING PAPER SERIES STATE DEPENDENT EFFECTS OF MONETARY POLICY: THE REFINANCING CHANNEL}, + author = {Eichenbaum, M. and Rebelo, Sergio and Wong, Arlene}, + year = {2018}, + litmapsId = {267519532} +} + + +@article{mortgage_guren_2018, + title = {Mortgage Design in an Equilibrium Model of the Housing Market}, + doi = {10.3386/w24446}, + author = {Guren, Adam M. and Krishnamurthy, A. and McQuade, Timothy J}, + journal = {Journal of Finance}, + year = {2018}, + litmapsId = {281822069} +} + + +@article{mortgage_abel_2021, + title = {How Do Mortgage Refinances Affect Debt, Default, and Spending? Evidence from HARP}, + doi = {10.1257/mac.20180116}, + author = {Abel, Joshua and Fuster, Andreas}, + journal = {American Economic Journal: Macroeconomics}, + year = {2021}, + litmapsId = {111879392} +} + + +@article{credit_guerrieri_2017, + title = {Credit Crises, Precautionary Savings, and the Liquidity Trap}, + doi = {10.1093/qje/qjx005}, + author = {Guerrieri, Veronica and Lorenzoni, Guido}, + journal = {Quarterly Journal of Economics}, + year = {2017}, + litmapsId = {146038338} +} + + +@article{interest_dimaggio_2017, + title = {Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging}, + doi = {10.1257/aer.20141313}, + author = {Maggio, Marco di and Kermani, A. and Keys, Benjamin J. and Piskorski, T. and Ramcharan, Rodney and Seru, Amit and Yao, Vincent}, + year = {2017}, + litmapsId = {3619689} +} + + +@article{mortgage_greenwald_2016, + title = {The Mortgage Credit Channel of Macroeconomic Transmission}, + doi = {10.2139/ssrn.2735491}, + author = {Greenwald, Daniel L.}, + year = {2016}, + litmapsId = {88268464} +} + + +@article{regional_beraja_2018, + title = {Regional Heterogeneity and the Refinancing Channel of Monetary Policy*}, + doi = {10.1093/qje/qjy021}, + author = {Beraja, Martin and Fuster, A. and Hurst, Erik and Vavra, Joseph}, + journal = {Quarterly Journal of Economics}, + year = {2018}, + litmapsId = {248698243} +} + + +@article{microeconomic_kaplan_2018, + title = {Microeconomic Heterogeneity and Macroeconomic Shocks}, + doi = {10.2139/ssrn.3203913}, + author = {Kaplan, Greg and Violante, G.}, + journal = {Journal of Economic Perspectives}, + year = {2018}, + litmapsId = {281652137} +} + + +@article{renancing_wong_2019, + title = {Refinancing and The Transmission of Monetary Policy to Consumption *}, + author = {Wong, Arlene}, + year = {2019}, + litmapsId = {242659922} +} + + +@article{effects_kinnerud_2025, + title = {The effects of monetary policy through housing and mortgage choices on aggregate demand}, + doi = {10.3982/qe2160}, + author = {Kinnerud, Karin}, + journal = {Quantitative Economics}, + year = {2025}, + litmapsId = {288166683} +} + + +@article{monetary_auclert_2019, + title = {Monetary Policy and the Redistribution Channel}, + doi = {10.1257/aer.20160137}, + author = {Auclert, Adrien}, + journal = {The American Economic Review}, + year = {2019}, + litmapsId = {122884840} +} + + +@article{liquidity_gorea_2017, + title = {Liquidity Constraints in the U.S. Housing Market}, + doi = {10.3386/w23345}, + author = {Gorea, Denis and Midrigin, Virgiliu}, + journal = {The Review of Economic Studies}, + year = {2017}, + litmapsId = {123383383} +} + + +@article{mortgage_berger_2021, + title = {Mortgage Prepayment and Path-dependent Effects of Monetary Policy}, + doi = {10.1257/aer.20181857}, + author = {Berger, David and Milbradt, Konstantin and Tourre, Fabrice and Vavra, Joseph}, + journal = {The American Economic Review}, + year = {2021}, + litmapsId = {12644277} +} +