The Distributional and Social Implications of Stabilization Policy
Paper Session
Sunday, Jan. 8, 2023 8:00 AM - 10:00 AM (CST)
- Chair: Alan Auerbach, University of California Berkeley
Consumer Bankruptcy as Aggregate Demand Management
Abstract
We study the role of consumer bankruptcy policy in macroeconomic stabilization, and how bankruptcy interacts with other automatic stabilizers, such as the income tax or countercyclical fiscal policy. Our economy features nominal rigidities, incomplete financial markets, and heterogeneous households with access to unsecured defaultable debt. We provide a sufficient statistic methodology for quantifying the dampening effect of automatic stabilizers on output fluctuations. Bankruptcy dampens the business cycle because the bankruptcy rate is countercyclical in the data, and because the average consumption effect of default is large relative to the marginal propensity to consume of savers. Quantitatively, for the United States, we show that the current bankruptcy code reduces the amplitude of the output fluctuations by 6%, which is between a third and a half of the effect of fiscal policy stabilizers. A policy that is lenient on past debts upon entering recessions, but promises to be harsh on future debts to encourage credit supply, mitigates the severity of downturns by another 7%.Monetary Policy, Heterogeneity, and the Housing Channel
Abstract
We investigate the role of housing and mortgage debt in the transmission and effectiveness of monetary policy. First, monetary policy induced-movements in house prices translate into consumption changes because of wealth effects. Second, a contractionary monetary shock raises the cost of borrowing which reduces the demand and as a result the liquidity of the housing market, further depressing house prices and further increases the cost of borrowing. Furthermore, nominal long-term mortgage debt implies that changes in monetary policy result in redistribution between lenders and borrowers and generate cash-flow effects that are larger for borrowing constrained households. We build a heterogeneous agent New Keynesian model with a frictional housing market to quantify the various mechanisms. The model is able to match the rich empirical heterogeneity in home ownership, leverage and MPC across households. In particular, our model is consistent with the significant difference in MPC between low- and high-LTV households that we document in the data. Our quantitative findings are as follows: First, we find that about 20% of the drop in aggregate consumption against a contractionary monetary shock is due to declining house prices. Second, we find asymmetric responses of the economy to shocks, with contractionary shocks yielding a larger response of all variables. Finally, we investigate how the transmission of monetary policy depends on the distribution of mortgage debt and find that monetary policy is more effective in stimulating the economy in an high-LTV environment.Disaggregated Economic Accounts: Measurement and Implications for Fiscal Policy
Abstract
We develop a system of disaggregated economic accounts, capturing the complex network of income and consumption linkages between spatially and sectorally differentiated units of households and firms. We measure disaggregated accounts on the basis of 2,400 household cells and 2,000 firm cells using administrative register data matched with detailed bank transactions data from Denmark. Mapping the disaggregated accounts into a Keynesian business cycle model with many agents and firms, we study (a) the origins of the Great Recession in Denmark; (b) the geography and sectoral breakdown of fiscal multipliers and their dependence on the nature of the shock; (c) employment-maximizing and welfare-maximizing policies.Discussant(s)
Matthew Rognlie
,
Northwestern University
Kartik Athreya
,
Federal Reserve Bank of Richmond
Benjamin Keys
,
University of Pennsylvania
Eric R. Young
,
University of Virginia
JEL Classifications
- E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook