Current work

Large fiscal transfers shift households between regions with high and low marginal propensities to consume (MPCs), resulting in nonlinear aggregate responses. We develop a Nonlinear DEGM Update (NDU) method that shifts the wealth distribution nonlinearly over a short time window while solving the aggregate economy using a fast, first-order state-space approximation. A 10 percent transfer of annual GDP increases output by 4.5 percent in the nonlinear and NDU solutions, but by 12.0 percent in the linear solution. The empirical liquid-wealth distribution around zero disciplines this nonlinearity and exhibits a strong asymmetry. A stochastic debt-entry cost closely reproduces this empirical pattern.

How effectively does defense spending translate into military capability? We introduce the military multiplier, defined as the percentage increase in military equipment generated by an additional dollar of defense spending. We show that the response of the relative price of defense goods to military buildups is a sufficient statistic for this multiplier: the stronger the price response, the smaller the multiplier. Time-series evidence for the United States shows that defense-sector prices rise sharply in response to military buildups in the post–Cold War period, implying a short-run multiplier of about 0.7, compared with values exceeding 1 during the Cold War. We develop and calibrate a multi-sector network model of the U.S. economy showing that this decline reflects high effective capital reallocation costs associated with the shrinking industrial base.

The Lucas critique holds that policy evaluations based on historical correlations can fail because policy changes alter expectation formation. We develop a new approach to monetary policy evaluation that addresses this concern: we elicit expectations under alternative policy scenarios from household surveys and feed these measured expectations into a heterogeneous agent model. The surveys reveal that the response of income and inflation expectations to interest rate changes is state-dependent. Incorporating these expectation differences into the model yields estimates of the effects of policy on aggregate consumption that are state-dependent, varying with economic conditions at the time of the policy change.

How should governments tax labor income when workers can shift into untaxed informal work? Combining Latin American household surveys with a heterogeneous-agent model of search, savings, and sectoral labor supply, we quantify the effects of progressivity in Mexico. Welfare-maximizing progressivity is over six times the current level, as gains from formalization among low earners initially outweigh the costs of evasion among high earners. The reform raises steady-state welfare by 4.3% of consumption and reduces informality by 5.4 percentage points. At equal revenue, progressivity delivers three to four times the welfare gain of higher labor- or capital-tax levels. Greater earnings inequality increases these gains while leaving optimal progressivity nearly unchanged.

Using historical income and wealth data, we show that war reduces inequality: the top-1% income share falls by 20% and the top-1% wealth share by 10%. We measure three key drivers of inequality-capital destruction, taxation, and inflation-in the data and quantify their role with a Heterogeneous Agent New Keynesian (HANK) model. Destruction depresses profits and thus top incomes. Taxation primarily influences wealth dynamics, while inflation has little effect on top shares, but reduces indebtedness among poorer households. We validate our findings using new data on inequality across German towns in World War 2 and cross-country data on profits.

This paper studies a HANK model with agents who respond to both idiosyncratic and aggregate uncertainty. Since aggregate uncertainty is modeled as ambiguity, it affects the steady state and linearized dynamics, allowing for fast computation and estimation. The interaction of aggregate uncertainty shocks and portfolio frictions generates a high capital premium as well as most cyclical comovement in macroeconomic aggregates. Heterogeneity in portfolios is crucial: when it is shut down, the model fails to explain investment dynamics and the capital premium disappears. Cautious price and wage setting by firms in anticipation of aggregate uncertainty shapes employment and inflation dynamics.