Working Papers

Unequal Business Cycles 

Standard incomplete-markets (SIM) models predict that the consumption of low-skilled households is more cyclical relative to the consumption of high-skilled because they hold fewer liquid assets and experience larger income changes. I use the Consumer Expenditure Survey (CEX) to show that the opposite is true in the data: lower-skilled households experience smaller consumption changes over the business cycles. I also show that this difference in consumption cyclicality is explained by the fact that high-skilled households consume relatively more luxuries. Motivated by these facts, I extend the SIM model to allow for non-homothetic preferences over goods, which I discipline using cross-sectional data on how consumption shares of luxuries and necessities vary with income (Engel curves). The model reproduces the observation that consumption is more cyclical for high-skilled households because they spend a larger share of their income on luxuries, which are easier to substitute over time. The model also predicts that the welfare costs of recessions are larger for low-skilled households, despite their lower consumption declines.

Work in Progress 

Monetary Policy Shocks and Redistribution across Income Groups 

This paper studies the heterogeneous impact of unexpected changes in monetary policy. In particular, how the consumption responses differ for households with different income levels and different income sources. Using data from the Consumer Expenditure Survey, I construct a time series for the consumption of different income groups and estimate the differential impact of monetary policy shocks (identified as in Romer and Romer (2004)). I find that positive monetary shocks are associated with large and persistent negative declines in non-durable consumption of low-income households relative to the consumption of high-income households. I also find this difference exists even when comparing households without financial and/or business income.

Government Debt, Fiscal Rules, and Monetary Policy Transmission

This paper studies how the choice of fiscal policy affects the transmission of monetary policy. When Ricardian Equivalence does not hold, the way a government finances the fiscal cost of interest rate changes matters for the overall effectiveness of the monetary policy. I illustrate the mechanism in a two-agent New Keynesian model in which a fraction of households do not have access to financial markets: When monetary policy is financed by lump-sum taxes or adjustment in government purchases (as opposed to debt rollover), there is an amplification of the effect on inflation and output. Moreover, the amplification increases with the size of government debt. Using identified monetary policy shocks for the US (identified following Romer and Romer (2004)), I test that prediction and find no significant amplification effect. This is consistent with a fiscal rule in which the government finances its interest expenditures with debt issuance.

Multiple Currencies and Limits to Seigniorage

This paper studies how the existence of an alternative currency affects the ability of a monetary authority to generate revenue from seigniorage. First, I derive conditions under which two currencies can coexist. Then I analyze the optimal policy when the monetary authority cares about seigniorage. This is the case, for instance, when money is privately issued or, as I show, when the government only cares about tax-payers. I find that the presence of a competing currency reduces the possible profits from issuing money and the optimal inflation choice. I also find that the optimal policy (as a function of the alternative currency’s inflation rate) is non-monotonic.