Using confidential loan-level data, we examine how Basel III influenced the responses of bank risk-taking to monetary policy shocks in China. We use a difference-in-differences (DID) approach, exploiting disparities in lending behavior between high- and low-risk bank branches before and after the new regulations. Our findings reveal a novel risk-weighting channel through which monetary policy easing significantly reduced bank risk-taking. However, this risk reduction was achieved by shifting lending towards ostensibly low-risk state-owned enterprises (SOEs) with government guarantees, despite their lower average productivity. Our findings suggest a trade-off facing China’s monetary policy between curbing bank risks and addressing credit misallocation. (JEL E52, G21, G28, L32, O16, P24, P34)
Technological lock-in has been a standard explanation for the slow take-off of clean innovation, but is hard to reconcile with forward-looking investors who anticipate the eventual switch to clean technologies. We provide an alternative explanation: strategic investment complementarities shape innovation and self-fulfilling prophecies can lead to delayed low-carbon transition. We analyze a standard directed technical change model with clean and dirty inputs. Under good input substitutability, two stable steady states co-exist, each allowing multiple transitional paths. Optimal low-carbon transition requires a Pigouvian tax rule combined with a coordination device; commitment to a Pigouvian tax trajectory cannot solve a coordination failure. (JEL H23, O31, O33, O44, Q54, Q55)
This paper examines the effects of primary budget surpluses, surprise inflation, and pegged interest rates before the Fed-Treasury Accord of 1951 on the US public debt/GDP ratio. We find that with the primary budget balance and without distortions in real interest rates caused by surprise inflation and the pre-Accord peg, debt/GDP would have declined only from 106 percent in 1946 to 74 percent in 1974, not to 23 percent as in actual history. Our findings imply that, over the last 76 years, only a small amount of debt reduction has been achieved through growth rates that exceed undistorted interest rates.
We explore how foreign central banks behave when firms engage in currency mismatch, borrowing heavily in dollars. A central bank can deal with risky private-sector mismatch in two ways: (i) with financial regulation or (ii) by accumulating reserves to better serve as a dollar lender of last resort. We highlight a novel externality: Individual central banks may overaccumulate dollar reserves, as this exacerbates a global scarcity of dollar-denominated assets, lowering dollar interest rates and encouraging firms to further increase their currency mismatch. Relative to the decentralized outcome, a global planner may prefer tighter financial regulation and reduced holdings of dollar reserves. (JEL E43, E44, E58, F31, F41, G21, G28)
This paper studies the sectoral and macroeconomic consequences of carbon taxes in four Nordic countries using a novel monthly measure of effective carbon tax rates. The suggested measure accounts for the time-varying emission coverage of taxes that are both explicitly and implicitly levied on greenhouse gas-emitting goods, thereby solving several issues of existing carbon tax measures currently used by the literature. Employing the new measure in a local projection setting, I find that carbon taxes reduce emissions as expected but also impair macroeconomic activity-though there is some heterogeneity in the effects across sectors and countries.
Labor productivity growth in the service sector may be mismeasured if workers with heterogeneous skills self-select into sectors. I document with US data that workers reallocated from manufacturing earn more than incumbent workers in professional services but less than incumbent workers in education, health, and public services. A generalized quantitative Roy model predicts a selection effect on labor productivity growth in professional services that is 10 percentage points higher than what a conventional selection model predicts. Overall, the selection effect contributes little to the cost disease of services, which contrasts sharply with the hypothesis in the literature. (JEL E24, J24, J31, J44, J45, L60, L80)
In trade models with scale economies, import liberalization reduces exports within industries by shrinking real market potential. We find this export destruction mechanism reduced US export growth following the permanent normalization of trade relations with China (PNTR). There was also an offsetting boost to exports from lower input costs. We use our estimates to calibrate a quantitative model and show that scale economies are economically important for trade policy analysis. Although PNTR increased aggregate US exports relative to GDP, exports declined in the most exposed industries. US gains from PNTR are positive but 30 percent smaller than under constant returns. (JEL D24, E23, F13, F14, O19, P33)
We propose a text-based measure of monetary policy stance that models FOMC statements as convex combinations of dovish and hawkish alternatives, providing a tractable representation of the Committee's position along the policy spectrum. Leveraging staff-drafted alternative statements, we fine-tune a pretrained language model to capture both quantitative precision and semantic tone. Stance is defined as the product of tone and novelty, and decomposed into expected and surprise components using high-frequency financial data. Surprises arise from shifts in tone relative to expectations or from statement novelty. Our framework enables counterfactuals showing how alternative communication could have moved markets. (JEL D83, D84, E31, E32, E43, E52, E58)
This paper examines the behavior of individuals susceptible to a deadly disease in a tractable equilibrium setting. We analytically characterize individually optimal mitigation behavior and the resulting equilibrium trajectory. Analysis is facilitated by a phase diagram. A key insight is that individually optimal behavior of those susceptible to the disease results in excessive caution. This behavior flattens the epidemic curve and prolongs the epidemic. In contrast, socially optimal behavior results in a higher infection rate, with a focus on minimizing cumulative deaths at minimum cost. The paper offers novel technical contributions and an improved understanding of externalities in econ-epi models.
This paper develops a framework in which university research depends endogenously on competition for tuition and talented students in the market for higher education. When students are highly stratified across colleges, or when tuition rises sharply with school rank, universities spend on R&D even if the direct contribution of research to teaching is small. The model is consistent with causal evidence and matches new features of the microdata. It explains why universities internally fund research with tuition, despite negligible returns to patenting. Calibrated simulations suggest that existing tuition policies boost university research while research subsidies crowd it out. (JEL I22, I23, L24, O31, O34)
The public sector hires disproportionally more women than men. Using microdata, we document gender differences in employment, transition probabilities, hours, and wages in the public and private sector. We calibrate a search and matching model where men and women decide whether to participate and whether to enter public or private sector labor markets. We quantify how much of the selection of women into the public sector is driven by (i) lower gender wage gaps, (ii) fewer hours, (iii) greater job security, or (iv) intrinsic preferences. Preferences and wages explain most of the overrepresentation, with significant variations across countries and educational groups.
I consider a New Keynesian framework where agents combine mis-specified forecasts and myopia to form expectations. This combination is consistent with inflation forecasts'late overshooting, under-reaction to forecast revisions, and overreaction to current inflation. Estimating the general equilibrium model on macroeconomic data shows that: (i) data favor combining autoregressive mis-specified forecasting rules with myopia over other alternatives; (ii) learning of mis-specified rules improves model fit; and (iii) mis-specified forecasts generate substantial internal persistence and amplification to exogenous shocks. Inflation expectations simulated from the best-fitting model closely match survey data, providing external validation for the proposed expectations formation process. (JEL D84, E12, E17, E21, E23, E31, E37)
We exploit substantial variation in land-market institutions across Indian states and detailed household-level panel data to assess the effect of land-market distortions on agricultural productivity. We develop a model of heterogeneous farms and distorted land markets, featuring (i) state-level barriers to land-market participation and (ii) idiosyncratic (farm-level) distortions to farm size. We separately identify and estimate the two sources of land-market distortions in each state. We find substantial differences across states in rental barriers with large negative effects on agricultural productivity. Distortions associated with land-market participation contribute substantially to agricultural productivity differences across Indian states. (JEL D24, O13, O18, Q12, Q15, Q24)
I develop a general equilibrium model featuring multidimensional skills and partial specialization in tasks to quantify the impact of several determinants on within-occupation inequality growth from 1980 to 2000. The model introduces a new mechanism by which demand shifts affect inequality: Workers within the same occupation perform multiple and different tasks. I structurally estimate the model using microdata and account for inequality growth due to three sources: changes in occupation demand, changes in the task content of occupations, and changes in labor composition. My findings indicate that changes in task content explain the majority of within-occupation inequality growth. (JEL D63, J21, J22, J23, J24)
Hsieh and Moretti (2019) find that relaxing land use regulations in three productive US cities would increase GDP by 3.7 percent. In this comment, I revisit their findings. I first attempt to replicate their result and find that their counterfactual would lower output. I document errors in their code that explain this discrepancy. I next show that the results of their model depend on the arbitrary choice of population unit. I propose a modification to their model that eliminates unit dependence. Their experiment raises output in the modified model, but the effect is two orders of magnitude smaller than what they report. (JEL E23, J24, J31, R23, R31)
We examine the relationship between large firms and the rising profit share in a model that features oligopolistic competition and consumer heterogeneity. Conditional on the sales distribution, consumer heterogeneity increases firm-level markups and the profit share. Using NielsenIQ data on purchases at the household-barcode level, we quantify the role of consumer heterogeneity, finding that the average markup and the profit share are 20 and 6.4 percentage points larger than predicted by a representative consumer model. Extrapolating our results to the period 1990-2021, rising income inequality implies an increase of more than 4 percentage points in the retail profit share. (JEL D12, D22, D33, L25, L81, M31)
In the United States, college dropout risk is sizable. We provide new empirical evidence that beliefs about the likelihood of earning a bachelor's degree predict college enrollment, and that the distribution of these beliefs exhibits widespread optimism. We incorporate this distribution of beliefs into an overlapping generations model with college as a risky investment that can be financed via federal loans, grants, family transfers, or earnings. We then examine the welfare impact of access to federal student loans. We find that access can reduce welfare for young adults who are low-skilled, poor, and optimistic, due to their mistaken beliefs. (JEL E61, E71, I22, I26, G51)
