Job Market Paper

Explaining the Macroeconomic Inertia Puzzle

Many macroeconomic models struggle to explain the sluggish response of aggregate variables to sudden shocks and changes in policy. While numerous theories of adjustment frictions and bounded rationality have been proposed to explain this macroeconomic inertia, no consensus has emerged among them. I show that canonical heterogeneous-agent models—Blanchard (1985) perpetual youth and Bewley (1986) incomplete markets—are consistent with aggregate consumption inertia if agents’ average expectations of income and interest rates align with survey expectations of these variables. To determine the causes and analyze the policy implications of inertia, I adopt a model of frictional Bayesian learning which can explain patterns of forecast errors in expectations data that existing theories struggle to account for. Incorporating this form of learning into a standard heterogeneous-agent New Keynesian environment, I provide a theory for how inertia arises endogenously. Inertia results when the equilibrium amplification of an initial shock exceeds expectations, causing them to slowly unanchor. This theory yields a novel drawback for inertial monetary policy rules and delayed financing of fiscal deficits: Policy regimes that act more gradually result in longer transmission lags.

Working Papers

Optimal Long-Run Fiscal Policy with Heterogeneous Agents
(with Adrien Auclert, Matt Rognlie, and Ludwig Straub)

We introduce a new method for characterizing the steady state of dynamic Ramsey problems, building on the dual approach to optimal taxation. Applying this method to standard calibrations of heterogeneous-agent models a la Aiyagari (1995), we find that in many cases Ramsey steady states do not exist, with our results suggesting that long-run immiseration is optimal instead. When Ramsey steady states do exist, they are associated with optimal long-run labor income taxes close to 100%. We show that these conclusions are related to strong anticipatory effects of future tax changes.

Publications

Online Estimation of DSGE Models
(with Marco Del Negro, Edward Herbst, Ethan Matlin, Reca Sarfati, and Frank Schorfheide)
The Econometrics Journal: Volume 24, Issue 1, Jan 2021, Pg. C33-C58

DSGE Forecasts of the Lost Recovery
(with Marco Del Negro, Marc P. Giannoni, Abhi Gupta, Pearl Li, & Erica Moszkowski)
International Journal of Forecasting: Volume 35, Issue 4, Oct-Dec 2019, Pg. 1770-1789
Also available as a Federal Reserve Bank of New York Staff Report.