Working Papers

Consumption, Wealth, and Income Inequality: A Tale of Tails, with Alexandre Gaillard, Christian Hellwig, and Nicolas Werquin, October 2023.

Revise and Resubmit, Quarterly Journal of Economics

[Draft] [SSRN Version]

Abstract: We provide evidence that the distributions of consumption, labor income, wealth, and capital income exhibit asymptotic power-law behavior with a strict ranking of upper tail inequality, in that order, from the least to the most unequal. We show analytically and quantitatively that the canonical heterogeneous-agent model cannot replicate the proper ranking and magnitudes of these four tails simultaneously. Because consumption and capital income in these models are asymptotically linear in wealth, mechanisms that are typically aimed at addressing the wealth tail thickness puzzle, based on heterogeneous type-dependent asset returns, come at the expense of causing a mirror consumption tail thinness puzzle. We match the cross-sectional data on these four Pareto tails by positing a combination of non-homothetic, wealth-dependent preferences and scale-dependent returns to capital. We illustrate the importance of accounting simultaneously for all four dimensions of top inequality by showing that they jointly discipline the long-run elasticity that governs the optimal capital tax rate.

Inequality, Business Cycles, and Growth: A Unified Approach to Stabilization Policies (Job Market Paper), with Alexandre Gaillard, November 2022.

[Draft] [Online Appendix] [SSRN Version] [Slides]

Abstract:  This paper studies the efficacy of discretionary stabilization policies, when household heterogeneity, business cycles and long-run growth interact. Consistent with empirical evidence, we develop a unified heterogeneous agent New Keynesian growth framework in which: (i) growth arises from innovative investment, (ii) a demand externality shapes economic activity, and (iii) household heterogeneity acts on those channels through the joint distribution of marginal propensities to consume (MPCs) and marginal propensities to invest (MPIs). First, we analytically show that an income redistribution channel from high-MPI "entrepreneurs" to high-MPC households increases technology growth if the stabilizer is sufficiently persistent. Second, while the aggregate demand externality pushes toward progressive stabilizers, the endogenous growth channel pushes toward regressive stabilizers. When policymakers do not balance among both extremes, a short- versus long-run stabilization tradeoff arises. We quantitatively investigate this tension based on temporary unemployment insurance extensions during the U.S. Great Recession. The government maximizes the short-run output multiplier at a value of 1.2 by financing the policy with progressive income taxes. This is, however,  at the cost of a long-run output loss with a multiplier of -0.2. Overall, our analysis provides a rationale to finance stabilizers by issuing government debt and/or by shifting the tax incidence on middle-class households.

Wealth, Returns, and Taxation: A Tale of Two Dependencies, with Alexandre Gaillard, August 2022. 

[Draft] [Online Appendix] [SSRN Version] [NBER SI Slides]

Abstract: We study wealth redistribution in a framework where individual portfolio choices and associated returns are correlated with wealth through: (i) type dependence, which reflects that investment skills drive return differences and (ii) scale dependence, which captures that wealth itself triggers returns. Using an analytical framework, we argue that several common heterogeneous agent models can be understood through the lens of a type and scale dependence representation. We show that four key statistics characterize the macroeconomic and welfare implications of wealth taxation: the right tail of the wealth distribution, the degree of scale and type dependence, and the extent to which returns reflect investment productivity. We then build a quantitative model calibrated using micro US data and find an optimal marginal wealth tax rate of 0.8 percent above an exemption level of $550K. The result is driven by two opposing forces. Under scale dependence, productivity and wealth accumulation decrease with the tax, as risk-taking depends on wealth. Under type dependence, a higher wealth tax reinforces the selection of skilled investors at the top and improves productivity. Finally, the marginal wealth tax only slightly increases when returns partially reflect rent motives, as both forces almost quantitatively offset each other. 

Monetary Policy and Global Bank Lending: A Reversal Interest Rate Approach, with Li Yu, November 2022.

[Draft] [SSRN Version]

Abstract: This paper studies the impact of monetary policy on the credit allocation of globally operating banks in an open economy. First, we document novel empirical evidence on the composition of bank lending among domestic and foreign assets for over thirty countries. At the country level, the bias toward domestic lending continuously fell in the early 2000s but increased by 10% during the low interest rate period after the Global Financial Crisis (GFC). Second, to account for this finding, we develop an analytical framework for global banking based on a portfolio approach, in which the credit allocation is jointly determined by three key elements: diversification opportunities, cross-border frictions, and bank profitability driven by interest margins between lending and deposit rates. We show that the effect of expansionary monetary policy on bank home bias is state-dependent. In times of low bank profitability and large balance sheet volumes, a further cut in the interest rate raises bank home bias, which rationalizes the surge in home bias observed after the GFC. Finally, we embed the portfolio analysis into a dynamic economy with nominal rigidities to quantify the international transmission of monetary policy through globally operating banks. Calibrated to the US economy, we find that the prolonged period of low interest rates has led to a persistently high bias toward domestic assets. 

An Analytical Characterization of Political Economy Fiscal Multipliers, February 2020. 

available upon request

Abstract: Recent decades have undergone an ongoing debate about the size of fiscal multipliers, the model setup in which they are analyzed and identification strategies. Simultaneously, a multitude of economies were stuck at the effective zero lower bound trying to stimulate the economy by expansive fiscal policies. During the European sovereign debt crisis we have additionally observed frequent turnovers of governments changing fiscal policies. This paper studies the size of fiscal multipliers under political economy constraints. As in Meltzer and Richard (1981), heterogeneous households agree upon the size of the exogenous stimulus, however disagree upon the way it is financed. I solve for political economy fiscal multipliers within a tractable heterogeneous agent New Keynesian (T-HANK) model characterized by permanent heterogeneity in closed form. Methodologically, I demonstrate how the use of GHH-preferences in DSGE models allows to analytically and tractably integrate political economy frictions into otherwise standard dynamic business cycle models with nominal rigidities. I show that the model solves the "MPC-MPE-Multiplier Trilemma for New Keynesian Model" for a plausible level of earnings inequality. The taxation plan chosen under full commitment within this framework generally differs from the one which maximizes fiscal multipliers and roughly halves fiscal multipliers relative to a representative household setup.

Work In Progress

Optimal Automatic Stabilizers in a Heterogeneous Agent New Keynesian Growth Economy, with Alexandre Gaillard.