Implications of Micro Level Heterogeneity for Macroeconomic Stabilization and Growth
Saturday, Jan. 8, 2022 12:15 PM - 2:15 PM (EST)
- Chair: Yuriy Gorodnichenko, University of California-Berkeley
Accelerating the Recovery: the Role of Automatic Stabilization Policy in a Model with Wealth Inequality
AbstractWe study the role of automatic rules in the tax-and-transfer system in stabilizing the U.S. economy. Automatic stabilization policy has received renewed interest in light of the COVID pandemic. We consider automatic stabilizers such as sales taxes, personal income taxes, corporate taxes, transfers (including unemployment benefits and food stamps), and retirement-related transfers. For this purpose, we build a realistic model of wealth and income inequality and nominal rigidities. Households can save in several assets, one of which is a retirement plan, which allows us to study the impact of allowing households access to their retirement savings early without penalty. Moreover, agents can endogenously decide whether to become employed or unemployed. We compare the impact of automatic stabilizers to discretionary fiscal policy (e.g., stimulus checks). In contrast to the previous literature, we compute nonlinear solutions to Krusell and Smith's (1998) type of model without linearizing at the aggregate level. This is possible to do using our deep-learning global solution method. Our framework allows us to solve for recurring aggregate dynamics, and not just for the effect of one-time unexpected shocks, usually considered in the literature.
Consumer Bankruptcy as Aggregate Demand Management
AbstractWe study the role of consumer bankruptcy policy in macroeconomic stabilization. Our economy features nominal rigidities, incomplete financial markets, and heterogeneous households with access to unsecured defaultable debt. In the data, bankruptcy is countercyclical. In our model, this reveals that the average consumption effect of default, or “ACED” (the causal effect of default on consumption), is positive. If in addition, the ACED is larger than the marginal propensity to consume of savers, then bankruptcy acts as an automatic stabilizer. A policy that is lenient on past debts upon entering a recession, but promises to be harsh on future debts to encourage credit supply, mitigates the severity of the downturn. Quantitatively, for the United States, we show that the current bankruptcy code reduces the amplitude of the output fluctuations by 9%, and that bankruptcy rules that systematically respond to the business cycle could reduce this number by a further 15%.
The Long-Term Distributional and Welfare Effects of Covid-19 School Closures
AbstractUsing a structural life-cycle model, we quantify the long-term impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. In the model, public investment through schooling is combined with parental time and resource investments in the production of child human capital at different stages in the children's development process. We quantitatively characterize both the long-term earnings consequences on children from a Covid-19 induced loss of schooling, as well as the associated welfare losses. Due to self-productivity in the human capital production function, skill attainment at a younger stage of the life cycle raises skill attainment at later stages, and thus younger children are hurt more by the school closures than older children. We find that parental reactions reduce the negative impact of the school closures, but do not fully offset it. The negative impact of the crisis on children's welfare is especially severe for those with parents with low educational attainment and low assets. The school closures themselves are primarily responsible for the negative impact of the Covid-19 shock on the long-run welfare of the children, with the pandemic-induced income shock to parents playing a secondary role.
- E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- E3 - Prices, Business Fluctuations, and Cycles