1. Innocent Bystanders? Monetary Policy and Inequality in the U.S. [Abstract], [Code and Data], [Media Coverage], [Public Version] (with Olivier Coibion, Yuriy Gorodnichenko and John Silvia), Journal of Monetary Economics, Vol. 88 (2017): 70-89 (first version: May 2012).
ABSTRACT: We study the effects of monetary policy shocks on - and their historical contribution to - consumption and income inequality in the United States since 1980 as measured by the Consumer Expenditure Survey. Contractionary monetary policy systematically increases inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary policy shocks account for a non-trivial component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document some of the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.
10. Measurement Error in Imputed Consumption [Abstract], [Slides], May 2018 (with Scott Baker, Michaela Pagel, and Steffen Meyer).
ABSTRACT: Because of limitations in survey-based measures of household consumption, a growing literature uses an alternative measure of consumption commonly referred to as `imputed consumption'. This approach utilizes annual snapshots of household income and wealth from administrative tax registries to calculate household consumption as the residual of the household budget constraint. In this paper we use transaction-level retail investment data to assess the measurement error that can result in imputed consumption due to intra-year changes in asset values and composition. We show that substantial discrepancies between imputed and actual spending can arise due to trading costs, asset distributions, variable trade timing, and volatile asset prices between two annual snapshots. While these errors tend to be quantitatively small and centered around zero on average, we demonstrate that they vary across individuals of different types and income levels and are highly correlated with the business cycle.
9. Elasticity of Household Retailer Choice [Abstract], [Slides], March 2018 (with Brian Baugh and Scott Baker).
ABSTRACT: Using transaction-level income and spending data, we demonstrate that households are highly elastic in their choice of individual retailers. For instance, about 30% of short-term marginal spending is done at retailers that the household has never patronized before. The degree of elasticity is asymmetric and varies by industry, size of the firms, characteristics of the customer base, location, and whether a firm is public or private. Because these retailers are not identical, household retailer choice can drive important aggregate trends. We show that the elasticity of household retailer choice has implications not only for entrepreneurship and firm-level competition, but can affect trends in aggregate cash-flow volatility, firm size, profitability, and labor intensity. Moreover, retailer choice is highly dispersed at a household level, with little overlap in retailers across individual households. Most of this dispersion is driven by location and household demographics and not by household income.
8. Shopping for Lower Sales Tax Rates [Abstract], [Slides], [Online Appendix], [Media Coverage], April 2018 (with Scott Baker and Stephanie Johnson). (submitted)
ABSTRACT: Using comprehensive high-frequency state and local sales tax data, we show that household spending responds strongly to changes in sales tax rates. Even though sales taxes are not observed in posted prices and have a wide range of rates and exemptions, households adjust in many dimensions, stocking up on storable goods before taxes rise and increasing online and cross-border shopping. The differences we find between short- and long-run responses have important implications for the efficacy of using sales taxes for counter-cyclical policy and for the design of an optimal tax framework. Interestingly, households adjust spending similarly for both taxable and tax-exempt goods. We embed an inventory problem into a continuous-time consumption-savings model and demonstrate that this seemingly irrational behavior is optimal in the presence of shopping trip fixed costs. The model successfully matches estimated short-run and long-run tax elasticities with an implied reservation wage of $7-10. We provide additional empirical evidence in favor of this new shopping-complementarity mechanism.
7. Long-Run Consequences of Public Policies: Tastes and Mortality [Abstract], [Slides], [Online Appendix], [Media Coverage], May 2018 (with Evgeny Yakovlev) (submitted)
ABSTRACT: We use two quasi-natural experiments in the 1980s and late 1990s to study how public policies successfully changed young consumers' tastes. We estimate the age profile of taste formation using a brief temporary prohibition period from 1985-87 which dramatically changed the relative supply of alcoholic drinks in Russia and shifted young consumers' long-run preferences from hard to light drinks. We find similar effects of the large import shocks in the late 1990s on young consumers' tastes while older consumers' tastes remained largely unchanged. The resulting large cohort differences in current alcohol consumption shares explain a significant part of the recent decrease in male mortality. Policy simulations suggest that mortality will continue to decrease by another 23\% over the next twenty years due to persistent effects on consumer tastes. Program impact evaluations that focus only on contemporaneous effects can therefore severely underestimate the total effect of such public policies.
Companion papers to :
7b. Habits and Multiple Equilibria [Abstract], February 2018.
6. Excess Sensitivity of High-Income Consumers [Abstract], [Slides], [Online Appendix], [Media Coverage], February 2018. (conditionally accepted at the Quarterly Journal of Economics). An earlier version of this paper was entitled Explaining Consumption Excess Sensitivity with Near-Rationality: Evidence from Large Predetermined Payments.
ABSTRACT: Using new transaction data, I find that consumption is excessively sensitive to large, regular, predetermined and salient payments from the Alaska Permanent Fund, with a large average marginal propensity to consume (MPC) of 25% for nondurables and services. The MPC is heterogeneous, monotonically increasing in income, and the average is largely driven by high-income households, who have MPCs above 50%. The micro data and the properties of the payments rule out most previous explanations of excess sensitivity such as liquidity constraints and inattention. Using a sufficient statistics approach, I show that the welfare loss from excess sensitivity depends on the MPC and the relative payment size as a fraction of income. Since these two statistics are negatively correlated, the welfare losses are similar across households and small (less than 0.1% of wealth), despite the large MPCs.
Companion papers to :
6b. Revisiting the Response of Household Spending to the Alaska Permanent Fund Dividend using CE Data [Abstract], [Code and Data], July 2015.
ABSTRACT: This paper revisits the important contribution of Hsieh (2003) to the analysis of the intertemporal allocation of household consumption. Using total expenditures to normalize income from the Alaska Permanent Fund Dividend instead of family income and an extended sample of the Consumer Expenditure Survey (CE), I show that log household spending on nondurables is excessively sensitive to the arrival of this predetermined cash flow, with a statistically significant elasticity between 11% and 16%. The previously estimated non-response can largely be attributed to attenuation bias introduced by substantial measurement error in self-reported before-tax family income, in particular over-reporting of very small values.
6c. Expected Permanent Fund Dividends: New Measures Based on a Narrative Analysis and Archival Data [Abstract], [Code and Data], July 2015.
ABSTRACT: This paper derives two measures of expected Alaska Permanent Fund Dividends (PFD), which are large annual payments to most Alaskan residents. The first measure is based on a narrative analysis of all major Alaskan newspapers from 1982 to 2014. The second is derived from new data from 1991 to 2014 of the Permanent Fund's income from assets, which largely determines the size of the annual dividend per person. Additional information about the PFD is provided that will help those who plan to use this quasi-natural experiment for future research.
5. Tax News: The Response of Household Spending to Changes in Expected Taxes [Abstract], [Old Slides], [Online Appendix], [NBER executive summary], [Movie], August 2016.
ABSTRACT: Although theoretical models of household behavior often emphasize fiscal foresight, empirical studies of household consumption have yet to document the role of news about tax changes. Using novel high-frequency bond data, I develop a model of the term structure of municipal yield spreads as a function of future top income tax rates and a risk premium. Testing the model using the presidential elections of 1992 and 2000 as two quasi-natural experiments shows that financial markets forecast future tax rates remarkably well in both the short and long run. Combining these market-based tax expectations with data from the Consumer Expenditure Survey, I find that spending of higher-income households increases by close to 1% in response to news of a 1% increase in expected after-tax lifetime (permanent) income. These findings imply that by ignoring anticipation effects, previous estimates of the total effect of a tax change could be substantially biased.
Note: This video shows the evolution of the path of market-based expected tax rates from the beginning of the Carter administration in January 1977 through the first year of the Reagan administration. With a forecast horizon of 1 to 15 years, the movie shows when markets begin to anticipate the Reagan tax cuts, and how persistent they expect these tax shocks to be. The paths of expected tax rates are calculated from the term structure of yield spreads between Treasury and municipal bonds between 1/1977 and 8/1982. The time series of the actual effective top 1% tax rate (i.e., the perfect foresight tax rate) is based on Saez (2004). [Note: If you cannot see the movie you can download the file here.]
Companion paper to :
5b. The Taxation of Bonds: A Short Primer [Abstract], October 2011.
ABSTRACT: The taxation of fixed-income securities is complex, but important for understanding the pricing of bonds. This short primer explains what researchers who are interested in bond pricing should know about the taxation of fixed-income securities. The different tax rules since 1970 are formalized within a simple asset pricing framework.
4. Propagation and Risk Spreading in Alternative Social Security Systems [Abstract], [Non-Technical Version], [Code], [Old Fortran77 Code], February 2018 (with Alan Auerbach, Ronald Lee, and Yury Yatsynovich). (resubmitted to the Journal of Public Economics)
ABSTRACT: Even with well-developed capital markets, there is no private market mechanism for trading between current and future generations. This generates a potential role for public old-age pension systems to spread economic and demographic shocks among different generations. This paper evaluates how different systems smooth and propagate shocks to productivity, fertility, mortality and migration in a realistic OLG model. We use reductions in the variance of wealth equivalents to measure performance, starting with the existing U.S. system as a unifying framework, in which we vary how much taxes and benefits adjust, and which we then compare to the existing German and Swedish systems. We find that system design and shock type are key factors. The German system and the benefit-adjustment-only U.S. system best smooth productivity shocks, which are by far the most important shocks. Overall, the German system performs best, while the Swedish system, which includes a buffer stock to relax annual budget constraints, performs rather poorly. Focusing on the U.S. system, reliance solely on tax adjustment fares best for mortality and migration shocks, while equal reliance on tax and benefit adjustments is best for fertility shocks.
3. The Impact of Emerging Market Competition on Innovation and Business Strategy [Abstract], [Media Coverage], November 2016 (with Nick Li and Mu-Jeung Yang). (submitted)
ABSTRACT: How do firms in high-income countries adjust to emerging market competition? We estimate how a representative panel of Canadian firms adjusts innovation activities, business strategies, and exit in response to large increases in Chinese imports between 1999 and 2005. On average, process innovation declines more strongly than product innovation. In addition, initially more differentiated firms that survive the increase in competition have better performance ex-post, but are ex-ante more likely to exit. Differentiation therefore does not ensure insulation against competitive shocks but instead increases risk.
2. Complementarity of Performance Pay and Task Allocation [Abstract], [Online Appendix], January 2016 (with Bryan Hong and Mu-Jeung Yang). (resubmitted to Management Science)
ABSTRACT: Complementarity between different management practices has been argued to be one potential explanation for persistent performance differences across firms. Using detailed data on internal organization for a nationally representative sample of firms, we empirically test for the existence of complementary joint adoption of performance pay incentives and decentralization of decision-making authority for tasks. To address endogeneity concerns, we exploit regional variation in income tax progressivity as an instrument for the adoption of performance pay. We find systematic evidence of complementarity between performance pay and decentralization of decision-making from principals to employees. However, adopting performance pay also leads to centralization of decision-making authority from non-managerial to managerial employees. The findings suggest that performance pay adoption leads to a concentration of decision-making control at the managerial employee level, as opposed to a general movement towards more decentralization throughout the organization.
1. Sources of Firm Life-Cycle Dynamics: Size vs. Age Effects [Abstract], January 2017 (with Bryan Hong and Mu-Jeung Yang). (major revision requested by the Journal of Finance)
ABSTRACT: What determines the life-cycle of businesses? Exploiting unique firm-level panel data on internal organization and innovation we establish three key sets of stylized facts to inform recent theories of firm life-cycles. First, life-cycle effects are driven by startups, not by new establishments of existing firms. Second, organizational restructuring and innovation are both strongly correlated with firm growth but not with firm age, in contrast to passive learning theories of firm dynamics. Third, there are important sectoral differences in innovation activities which are monotonically increasing in firm size for manufacturing firms but hump-shaped for firms in service industries.
- Do Household Finances Constrain Unconventional Fiscal Policy? [Abstract] (with Scott Baker, Leslie McGranahan, and Brian Melzer).
ABSTRACT: Can a pre-announced sales tax change stimulate the economy by inducing consumers to shift purchases forward before tax rates raise? This form of 'unconventional' fiscal policy has received attention during the financial crises, when conventional monetary policy was constrained by the zero lower bound on nominal interest rates (e.g., Correia, Farhi, Nicolini, and Teles 2013). Building on the current system of sales taxation, state and local jurisdictions could even set different rates depending on the state of the local economy, and potentially based on automatic rules. Moreover, making the intervention revenue neutral over the business cycle would neutralize potentially offsetting wealth or income effects when announcing the policy. Necessary conditions for such unconventional fiscal policies to be effective are (i) that consumers are aware of the sales tax changes, (ii) that the tax elasticity of spending is large enough to draw spending from periods far enough in the future, when aggregate demand is back to normal, and (iii) that consumers have sufficient resources to make purchases. Two previous papers, Agarwal, Marwell, and McGranahan (2017) and Baker, Johnson, and Kueng (2018), provide evidence that the first condition is satisfied in practice. A substantial fraction of consumers responds to temporary state sales tax holidays and to persistent pre-announced sales tax changes at the local and state level. Most of the response is in the form of stockpiling of consumer goods, with larger responses for more storable and durable goods. However, these studies are limited in scope by either the policy's coverage of a small set of products (e.g., in the case of sales tax holidays in Agarwal et al. 2017) or limitations of the spending data used to study broader sales tax changes (e.g., retail spending covered by AC Nielsen scanner data in Baker et al. 2018). In this paper, we study the response of vehicle purchases to state and local sales tax changes, building on the research design of Baker et al. (2018). Vehicles are the largest component of durable spending, which itself is the most volatile portion of consumer spending through the business cycle. Vehicle purchases have been the target of limited fiscal stimulus during the Great Recession; see e.g., Mian and Sufi (2013) and Green, Melzer, Parker, and Rojas (2017), who analyze the 'cash for clunkers' program. In principle, the elasticity of vehicle spending to sale taxes may be larger or smaller than that of household goods. On the one hand, the intertemporal substitution of longer-lasting durables is likely to be higher than that of less durable items. On the other hand, large expenditures on durables typically require financing, so financial constraints may reduce the response to tax changes. The latter constraint is likely to bind particularly in economic recessions, when household income and credit supply falls.
- Dynamic Pricing: Evidence from Sales Tax Changes and Retailer-Customer Linked Panel Data [Abstract] (with Stephanie Johnson and Scott Baker).
ABSTRACT: We study the behavior of retailers to exogenous changes in sales taxes and wholesale prices using scanner panel data that links customers to retailers.
- Household Borrowing Response to Large Anticipated Income Shocks: Evidence from the Alaska Permanent Fund (with Andreas Fuster and Brian Melzer).
- The Note Issue Paradox: Free Banking in Switzerland 1872-1881 [Abstract], Working Paper, March 2007. (This was my 1st-year economic history paper in graduate school. Brad DeLong thought it was worth publishing so I am making it public here.)
ABSTRACT: This paper uses the unique institutional setting of Swiss cantons from 1872 to 1881 to study the note-issuing behavior of private banks in a free banking system. I find that these banks over-issue notes, in contrast to recent literature on free banking in the United States in the 19th century such Bodenhorn and Haupert (1996). This new conclusion results from measuring two additional determinants of note-issuing that have previously been ignored: the average withdrawals from deposit accounts, and the interest rate paid on those deposit accounts. Controlling for these two variables reveals that the expected return on note-issuing exceeds the returns on deposit creation. Therefore, banks issued too many notes, failing to take into account the negative externality imposed on other issuing banks by the increased transaction costs that result from the larger flow of species and by the effect on the exchange rate volatility.
- The Impact of Immigration on Swiss Wages: A Fixed Effects Two Stage Least Squares Analysis [Abstract], Working Paper, February 2005. (This was a term paper in my last year of undergraduate studies. It still gets some citations so I am posting it here for reference.)
ABSTRACT: This paper studies how immigration from 1993 to 2000 affected the Swiss labor market.
- Evaluation wirtschaftspolitischer Programme (English title: Evaluation of Regional Economic Promotion Policies), May 2005. (This was my Master's thesis.)
- Discussion of Damon Jones and Ioana Marinescu, "The Labor Market Impacts of Universal and Permanent Cash Transfers: Evidence from the Alaska Permanent Fund," American Economic Association (AEA) Annual Meeting, Philadelphia PA, January 2018.
- Discussion of Deniz Aydin, "The Marginal Propensity to Consume out of Credit: Evidence from Random Assignment of 54,522 Credit Lines," The Society for Financial Studies (SFS) Finance Cavalcade Conference, Vanderbilt University, Nashville TN, May 2017.
- Discussion of Tania Babina, Chotibhak Jotikasthira, Christian Lundblad and Tarun Ramadorai, "Heterogenous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds," American Finance Association (AFA) Annual Meeting, San Francisco CA, January 2016.
- Discussion of Karel Mertens, "Marginal Tax Rates and Income: New Time Series Evidence," CIREQ Macroeconomics Conference, Montreal Canada, April 2014.