When Does Government Debt Crowd Out Investment? Joint with Shu-Chun S. Yang.
Journal of Applied Econometrics, 30(1),
January/February 2015: 24-45.
We examine when government debt crowds out investment for the U.S. economy
using an estimated New Keynesian model with detailed fiscal specifications and
accounting for monetary and fiscal policy interactions. Whether investment is
crowded in or out in the short term depends on policy shocks triggering debt
expansions: Higher debt can crowd in investment for cutting capital tax rates or
increasing government investment. Contrary to the conventional view, no
systematic relationships between real interest rates and investment exist,
explaining why reduced-form regressions are inconclusive about crowding-out. At
longer horizons, distortionary financing is important for the negative
investment response to debt. Online Appendix.
Fiscal Limits: The Case of Greece.
Joint with Huixin Bi.
Journal of Applied Econometrics, 29(7),
November/December 2014: 1053-1072. This paper uses Bayesian methods to estimate a real business cycle model
that allows for interactions among fiscal policy instruments, the stochastic
'fiscal limit,' and sovereign default. Using the particle filter to perform
likelihood-based inference, we estimate the full nonlinear model with
post-EMU data until 2010Q4. We find that 1) the probability of default on
Greek debt was in the range of 5% to 10% in 2010Q4 and 2) the 2011 surge in
the Greek real interest rate is within model forecast bands. The results
suggest that a nonlinear rational expectations environment can account for
the Greek interest rate path. Online Appendix.
Estimating Sovereign Default Risk.Joint
with Huixin Bi. American Economic Review Papers and Proceedings,
102(3), May 2012: 161-166 This paper uses Bayesian methods to estimate the sovereign default
probability for Greece and Italy in the post-EMU period. We build a real
business cycle model that allows for interactions among fiscal policy
instruments, sovereign default risk, and a "fiscal limit," which measures
the maximum level of debt the government is willing to finance. We estimate
the full nonlinear model using likelihood inference methods. Although we
find that Greece historically had a lower default probability than Italy for
a given debt level, our estimates suggest that the Italian government is
more willing to service debt than the Greek government.
Monetary and Fiscal Policy Interactions in the Post-War U.S. Joint with Shu-Chun S. Yang. European Economic Review,
55(1), January 2011: 140-164 A New Keynesian model allowing for both an active monetary and passive fiscal
policy (AMPF) regime and a passive monetary and active fiscal policy (PMAF) regime
is estimated to fit various samples from 1955 to 2007. We find that the U.S. data in the pre-
Volcker period strongly prefer an AMPF regime, even with a prior centered in the PMAF
region. However, the estimation is not very informative about whether the monetary authority’s
reaction to inflation is greater than one-for-one in the pre-Volcker period, as much
lower values can still preserve determinacy under passive fiscal policy. In addition, we find
that whether a PMAF regime can generate consumption growth following a government
spending increase depends on the degree of price stickiness. An income tax cut can generate
an unusual negative labor response if monetary policy aggressively stabilizes output growth.
Dynamics of Fiscal Financing in the United States. Joint with
Eric M. Leeper and Michael Plante. Journal of Econometrics, 156(2), June 2010: 304-
321 General equilibrium models that include policy rules for government spending, lump-sum transfers, and distortionary
taxation on labor and capital income and on consumption expenditures are fit to U.S. data under rich specifications of fiscal policy rules to obtain several
results. First, the best-fitting model allows many fiscal instruments to respond to debt. Second, responses of aggregates to fiscal policy shocks under rich
rules vary considerably from responses where only non-distortionary fiscal instruments finance debt. Third, in the short run, all fiscal instruments except
labor taxes react strongly to debt, but long-run intertemporal financing comes from all components of the government's budget constraint. Fourth, debt-financed
fiscal shocks trigger long lasting dynamics; short- and long-run multipliers can differ markedly.
Clearing Up the Fiscal Multiplier Morass.
July 2015. Joint with Eric M. Leeper and Todd B. Walker.
Resubmitted to American Economic Review We use Bayesian prior and posterior analysis of a monetary DSGE model, extended to include fiscal details and two distinct monetary-fiscal policy regimes, to quantify government spending multipliers in U.S. data. The combination of model specification, observable data, and relatively diffuse priors for some parameters lands posterior estimates in regions of the parameter space that yield fresh perspectives on the transmission mechanisms that underlie government spending multipliers. Posterior mean estimates of short-run output multipliers are comparable across regimes—about 1.4 on impact—but much larger after 10 years under passive money/active fiscal than under active money/passive fiscal—means of 1.9 versus 0.7 in present value.
Online Appendix. 2011 Working
Hours and Employment Over the Business Cycle.
April. 2016. Joint with Matteo Cacciatore and Giuseppe Fiori.
We estimate with Bayesian methods and U.S. data a benchmark general equilibrium model
that includes labor-market search frictions and a standard neoclassical hours-supply decision.
We show that this model cannot account for the cyclical behavior of hours and employment and
their empirical covariance with macroeconomic time series. Two additional features reconcile
the model with the data: non-separable preferences that exhibit a weak short-run wealth effect
on hours supply and hours adjustment costs. The model offers a structural explanation for
the empirical observation that in post-war U.S. recoveries, the covariance between the labor
margins is either positive or negative. Moreover, in these episodes, the contribution of hours
per worker to employment and GDP is quantitatively significant, but whether it is positive or
negative depends on the historical innovations responsible for labor market fluctuations. While
we estimate the model on U.S. data, the model features are flexible enough to reproduce a
broad array of empirical regularities related to the margins of labor adjustment observed across
Aggregate Investment Dynamics and Vintage Effects.
Joint with Giuseppe Fiori.
This paper develops a neoclassical growth model with heterogeneous firms to study the effects of environmental policies. The model framework links the distribution of plants to an endogenous capital accumulation and technology adoption decision, making it the first to study both the timing of capital replacement and the endogenous movements in the plant distribution following environmental policy legislation. The main contribution is to demonstrate that the plant distribution should be of interest to policymakers. Short-run qualitative and quantitative responses to a carbon tax enactment vary depending upon whether or not plants vary in emission rates. Heterogeneous emission rates, a feature consistent with plant-level data, induce the economy’s average energy efficiency to rise following a carbon tax and imply dynamics that differ from a representative firm model. Policies that initially exempt older establishments and alternative revenue-recycling scenarios alter the short and long run effects as well.
Legislative and implementation lags inherent in the political process often allow private agents to receive news about their future
tax rates, giving agents "tax foresight." This paper investigates the effects of tax foresight on monetary policy under various assumptions about the
information set of the monetary authority. We examine the welfare effects of tax foresight and how such foresight affects the monetary authority's ability to
implement its policy. Our model is a simple version of the dynamic sticky price models extended to include possible foresight about changes in distortionary taxes.
We find that the optimal response of the interest rate to anticipated tax changes can be qualitatively different from the response under a simple Taylor rule and that
welfare rankings under foresight depend crucially on the welfare measure. In addition, identification issues present when the monetary authority has partial information
about the state of the economy make it impossible for the monetary authority to recover the correct structural disturbances from its observable variables. This, in turn,
causes the monetary authority to induce history dependence in endogenous variables and worsen the welfare of private agents.