Research

Abstract: How should governments with a preference for redistribution design tax policies when facing limited borrowing? This paper studies optimal taxation in a small open economy with heterogeneous agents and endogenous debt constraints arising from the government's limited commitment to fiscal policies. The optimal labor tax decreases over time and is non-zero in the limit, and the optimal capital and domestic borrowing taxes are positive in the limit, deviating from the standard Ramsey tax results. The government’s redistributive motive directly affects optimal tax levels, whereas binding debt constraints influence optimal tax dynamics. In the numerical analysis, a stronger redistributive preference requires greater initial tax distortions and a higher external debt level in the long run.

Abstract: The recent decrease in U.S. money velocity raises debates about its unit root behavior. This paper revisited the random walk hypothesis (RWH) of the U.S. money velocity in 1960-2010 and two sub-periods 1960-85 and 1986-2010 by applying the Variance Ratio methodologies, including new nonparametric tests by Wright (2000) and Belaire-Franch and Contreras (2004). The results suggested that the velocity would likely increase, and the U.S. monetary policy will soon stimulate GDP and employment. Furthermore, past velocity is important to predict the future outcomes, and changes in financial structural could alter the empirical characteristics of the velocity series.

Abstract: This paper proposes a theory of sovereign debt sustainability based on the government’s motive for redistribution. I study debt and distortionary tax policies in a heterogeneous-agent small open economy with the government’s lack of commitment. Access to external financing reduces the distortionary cost of redistribution. Therefore, default resulting in financial autarky is endogenously costly. The theory is quantitatively consistent with Italy’s recent external debt buildup and the cross-country correlation between inequality and external debt. Optimal austerity policies are increasing external borrowing and redistribution in the short run, while reducing redistribution to repay debt in the long run.

Abstract: We analyze the economic effects of two major family policies in the United States, the Child Tax Credit and the Child Care and Development Fund, in an overlapping generations framework where altruistic parents invest in their child’s skill using parent time and purchased childcare. We incorporate realistic differences in the design and uptake rates of these two policies, endogenizing the lower uptake rates for childcare subsidies with a fixed cost of access incurred by the household. We find that eliminating the cost of uptake for the childcare subsidy yields higher welfare gains in the long run than a spending-equivalent increase in the tax credit level. We decompose these welfare gains and find that, for childcare subsidies, they stem from raising the average level of consumption and leisure in the economy, whereas welfare gains from the tax credit are due to changes in the distribution of these quantities across households. We then compare the effects of the 2018 child tax credit expansion with a counterfactual spending-equivalent expansion of the childcare subsidy implemented by lowering the uptake cost. The childcare subsidy yields higher welfare gains in the long run. These gains, however, accrue more slowly over the transition than those of the tax credit expansion because they are driven by the dynamics of child skill accumulation. 

Abstract: Sudden stops are often accompanied by high income inequality and increases in consumption inequality during crises. We rationalize this fact in a sudden stop model of collateral constraints by incorporating income inequality and nonhomothetic preferences. Nontradable goods are more income-elastic than tradable goods. Borrowings of high income households have a stronger effect on future real exchange rates than low-income households. Excessive international debt accumulation by high income households increases the frequency and severity of sudden stop crises. On the other hand, low income households underborrow from a social perspective. Both income inequality and nonhomotheticity of preferences amplify the inefficiency of the pecuniary externality. Therefore, macroprudential policies are more welfare improving than in standard models.