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Session 14: Macroeconomics and Inequality

September 11-13, 2019 | Landau Economics Bldg, 579 Serra Mall, Room 134 (A), Stanford

Macroeconomics increasingly emphasizes inequality. When heterogeneous agents interact in frictional markets, macro aggregates depend on the distribution of wealth and cannot be characterized by a representative agent. At the same time, macro shocks and policies have redistributive effects.

Just like last year, this session aims to bring together researchers working on macro and inequality. We welcome theoretical work on heterogeneous agent models, empirical studies with micro data and combinations thereof. We expect to attract both macroeconomists as well as applied microeconomists working on labor economics, firm dynamics, international economics, urban economics and household finance.

Organizers: Adrien Auclert (Stanford), Kurt Mitman (IIES Stockholm), Martin Schneider (Stanford), Chris Tonetti (Stanford Graduate School of Business) and Arlene Wong (Princeton University)

In this Session

Sep 11 | 8:30 am to 9:00 am

Check-in | Breakfast

Sep 11 | 9:00 am to 10:00 am

Shocks, Frictions, and Inequality in US Business Cycles

Presented by: Ralph Luetticke (University of College London)
Co-Author(s): Christian Bayer (University of Bonn) and Benjamin Born (Frankfurt School of Finance & Management)

Abstract: In how far does inequality matter for the business cycle and vice versa? Using a Bayesian likelihood approach, we estimate a heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice between liquid and illiquid assets. The model enlarges the set of shocks and frictions in Smets and Wouters (2007) by allowing for shocks to income risk and portfolio liquidity. We find income risk to be an important driver of output and consumption. This makes US recessions  more demand driven relative to the otherwise identical complete markets benchmark (RANK). The HANK model further implies that business cycle shocks and policy responses have significantly contributed to the evolution of US wealth and income inequality.

Sep 11 | 10:00 am to 10:30 am


Sep 11 | 10:30 am to 11:30 am

Redistribution, Risk Premia, and the Macroeconomy

Presented by: Rohan Kekre (University of Chicago Booth School of Business)
Co-Author(s): Moritz Lenel (Princeton University)

We study the effects of redistribution on risk premia and investment in a heterogeneous agent New Keynesian environment. Heterogeneity in agents’ marginal propensity to take risk (MPR) summarizes differences in risk aversion, constraints, rules of thumb, and background risk relevant for portfolio choice on the margin. Shocks which redistribute to agents with high MPRs reduce risk premia and, absent a monetary policy tightening, raise investment. We quantitatively evaluate the role of this mechanism for
the transmission of conventional monetary policy in the U.S. economy. An unexpected reduction in the nominal interest rate redistributes to agents with high MPRs and lowers the risk premium. This rationalizes the relative roles of dividend growth, risk-free rates, and excess returns in generating an increase in the stock market and contributes substantially to the transmission of monetary policy through investment.

Sep 11 | 11:30 am to 12:00 pm


Sep 11 | 12:00 pm to 1:00 pm

Monetary Policy in Incomplete Markets Models: Theory and Evidence

Presented by: Kurt Mitman (IIES Stockholm)
Co-Author(s): Marcus Hagedorn (University of Oslo), Lourii Manovskii (University of Pennsylvania)
Sep 11 | 1:00 pm to 2:00 pm


Sep 11 | 2:00 pm to 3:00 pm

Markups and Inequality

Presented by: Corina Boar (NYU)
Co-Author(s): Virgiliu Midrigan (NYU)
Sep 11 | 3:00 pm to 3:30 pm


Sep 11 | 3:30 pm to 4:30 pm

Trickle-Down Housing Economics

Presented by: Charlie Nathanson (Northwestern University)

This paper provides a quantitative framework for estimating the effects on house prices and household welfare of building different types of housing within a city or metropolitan area. According to our estimates, low-income households without a college degree benefit more from the construction of low-quality rather than high-quality housing, but low-quality  construction makes many other households worse off. These conclusions depend on household mobility across cities, the strength of urban spillovers, the indivisibility of housing, and the differential preferences of households with and without a college degree.

Sep 11 | 4:30 pm to 5:00 pm


Sep 11 | 5:00 pm to 6:00 pm

Learning about Housing Cost

Presented by: Fabian Kindermann (University of Regensburg)
Co-Author(s): Julia Le Blanc (Research Centre of Deutsche Bundesbank), Monika Piazzesi (Stanford University), Martin Schneider (Stanford University)
Sep 11 | 6:10 pm


Sep 12 | 8:30 am to 9:00 am


Sep 12 | 9:00 am to 10:00 am

Trading Up and The Skill Premium

Presented by: Arlene Wong (Princeton)
Co-Author(s): Nir Jaimovich (Zurich University), Sergio Rebelo (Northwestern University) and Miao Ben Zhang (USC)
Sep 12 | 10:00 am to 10:30 am


Sep 12 | 10:30 am to 11:30 am

The Rise of Niche Consumption

Presented by: Joseph Vavra (University of Chicago)
Co-Author(s): Brent Neiman (University of Chicago Booth School of Business)

We document that household consumption bundles look increasingly different from each other. Specifically, we document two divergent trends in the concentration of product level spending with narrow consumption categories: 1) Individual households are concentrating their spending on a smaller number of products. 2) The total number of products available has increased and the concentration of aggregate spending across products has decreased. Together, these trends imply growth in the importance of product "niches": households increasingly concentrate spending on their preferred products, but these preferred products increasingly differ across households. This rise in niche consumption holds within income and other demographic groups, within geographic locations and even within most retailers, but is closely associated with product churn. We build a model with simple analytical solutions in which household and aggregate concentration differ, as in the data. This model delivers an important role for both intensive and extensive margin effects on the elasticity of product demand as well as heterogeneity in markups across products. The model implies that a decline in the cost of creating new products is the most  plausible explanation for the rise of niche consumption. Matching the rise of niche consumption in the model leads to greater "selection effects" in the ideal price index and resulting welfare gains which are not present in models where all products are consumed by a representative household.

Sep 12 | 11:30 am to 12:00 pm


Sep 12 | 12:00 pm to 1:00 pm

Job Search Behavior Among the Employed and Non-Employed

Presented by: Aysegul Sahin (The University of Texas at Austin)
Co-Author(s): Jason Faberman (Federal Reserve Bank of Chicago), Andreas Mueller (University of Texas, Austin), and Giorgio Topa (Federal Reserve Bank of New York)
Sep 12 | 1:00 pm to 2:00 pm


Sep 12 | 2:00 pm to 3:00 pm

Demand-Driven Labor Market Polarization

Presented by: Marti Mestieri (Northwestern University)
Co-Author(s): Diego Comin (Dartmouth College) and Ana Danieli (Northwestern University)

We document that income elastic sectors are more intensive in high- and low-skill occupations than income inelastic sectors, which are relatively more middle-skill intensive. As a result, increases in aggregate expenditure have an asymmetric effect on labor demand across occupations and cause labor-market polarization. We quantify the importance of this demand-driven labor market polarization for the US using a general equilibrium model with endogenous job assignment and nonhomothetic demand. Our model is calibrated to aggregate variables from 1980 and household-level estimates of sectoral income elasticity. We find that the increase in aggregate expenditure from 1980 to 2016 accounts for 50% of the increase in the wage bill share of high-skill occupations, 60% of the decline for medium-skill occupations and virtually all of the increase in the wage bill share of low-skill occupations. This mechanism is also quantiatively important to understand the evolution of labor market outcomes across occupations in the period 1950-1980 and in other developed economies.

Sep 12 | 3:00 pm to 3:30 pm


Sep 12 | 3:30 pm to 4:30 pm

Financing Insurance

Presented by: Adriano Rampini (Duke University)
Co-Author(s): S. Viswanathan (Duke University)

Insurance has an intertemporal aspect as insurance premia have to be paid up front. We argue that the financing of insurance is key to understanding basic insurance patterns and insurers’ balance sheets. Limited enforcement implies that insurance is globally monotone increasing in household net worth and income, incomplete, and precautionary. These results hold in economies with income risk, durable goods and collateral constraints, and durable goods price risk, under quite general conditions. In equilibrium, insurers are financial intermediaries with collateralized loans as assets and diversified portfolios of insurance claims as liabilities. Collateral scarcity lowers the interest rate, reduces insurance, and increases inequality.

Sep 12 | 4:30 pm to 5:00 pm


Sep 12 | 5:00 pm to 6:00 pm

Risky Insurance

Presented by: Joseph Briggs (Federal Reserve Board of Governors)
Co-Author(s): Chris Tonetti (Stanford Graduate School of Business)
Sep 12 | 6:30 pm


Sep 13 | 8:30 am to 9:00 am


Sep 13 | 9:00 am to 10:00 am

Pareto Extrapolation: Bridging Theoretical and Quantitative Models of Wealth Inequality

Presented by: Alexis Toda (UC San Diego)
Co-Author(s): Emilien Gouin-Bonenfant (UC San Diego)

We propose a new, systematic approach for analyzing and solving heterogeneous-agent models with fat-tailed wealth distributions. Our approach exploits the asymptotic linearity of policy functions and the analytical characterization of the Pareto exponent to make the solution algorithm more transparent, efficient, and accurate with zero additional computational cost. As an application, we solve a heterogeneous-agent model that features persistent earnings and investment risk, borrowing constraint, portfolio decision, and endogenous Pareto-tailed wealth distribution. We find that a wealth tax is a “lose-lose” policy: the introduction of a 1% wealth tax (with extra tax revenue used as consumption rebate) decreases wage by 6.5%, welfare (in consumption equivalent) by 7.7%, and total tax revenue by 0.72%.

Sep 13 | 10:00 am to 10:15 am


Sep 13 | 10:15 am to 11:15 am

A Theory of Human Capital Specialization

Presented by: Titan Alon (UC San Diego)
Co-Author(s): Coauthor: Daniel Fershtman (University of Bonn)

This paper generalizes the canonical human capital model of Mincer (1958), Schultz (1961), and Becker (1964) to allow for human capital accumulation through specialization, nesting the original model as a special case. Individuals dynamically decide how to allocate their time between working and studying across an arbitrary number of heterogeneous activities under sequential uncertainty about the returns. We characterize the optimal time allocation policy and show that it features gradual specialization, whereby individuals progressively narrow the range of skills they invest in as human capital accumulation proceeds. The optimal policy is also separable in the state space, which greatly reduces its computational complexity and renders the model empirically tractable even when the number of skills is large. We estimate the parameters of the model to match the distribution of earnings in the Census micro-data. Using the fitted model, we conduct several counter-factuals to quantitatively evaluate the contribution of this gradual specialization process to the formation of human capital, educational attainment, and income inequality. Our results affirm the classical conjecture that specialization is a critical determinant of human capital accumulation.

Sep 13 | 11:15 am to 11:30 am


Sep 13 | 11:30 am to 12:30 pm

Human Frictions to the Transmission of Economic Policy

Presented by: Michael Weber (University of Chicago)
Co-Author(s): Francesco D'Acunto (Boston College), Daniel Hoang (Karlsruhe Institute of Technology) and Maritta Paloviita (Bank of Finland)

Intertemporal substitution is at the heart of modern macroeconomics and finance as well as economic policymaking, but a large fraction of a representative population of men – those below the top of the distribution by cognitive abilities (IQ) – do not change their consumption propensities with their inflation expectations. LowIQ men are also less than half as sensitive to interest-rate changes when making borrowing decisions. Our microdata include unique administrative information on cognitive abilities, as well as economic expectations, consumption and borrowing plans, and total household debt from Finland. Heterogeneity in observables such as education, income, other expectations, and financial constraints do not drive these patterns. Costly information acquisition and the ability to form accurate forecasts are channels that cannot fully explain these results. Limited cognitive abilities could be human frictions in the transmission and effectiveness of fiscal and monetary policies that operate through household consumption and borrowing decisions.