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Department of Economics
University of Maryland
College Park, MD 20742

Graduate Program:
301-405-3544

Undergraduate Program:
301-405-3266

Research


“Quantitative Easing and Inequality” (Job Market Paper) [PDF]

This paper studies how quantitative easing (QE) affects household welfare across the wealth distribution. I build a heterogeneous agent New Keynesian (HANK) model with household portfolio choice, wage and price rigidities, endogenous unemployment, frictional financial intermediation, an effective lower bound (ELB) on the policy rate, forward guidance, and QE. To quantify the contribution of the various channels through which monetary policy affects inequality, I estimate the model using Bayesian methods, explicitly taking into account the occasionally binding ELB constraint and the QE operations undertaken by the Federal Reserve during the 2009-2015 period. I find that QE program unambiguously benefited all households by stimulating economic activity. However, it had non-linear distributional effects. On the one hand, it widened the income and consumption gap between the top 10% and the rest of the wealth distribution, by boosting profits and equity prices. On the other hand, QE shrank inequality within the lower 90% of the wealth distribution, primarily by lowering unemployment. On net, it reduced overall wealth and income inequality, as measured by the Gini index. Surprisingly, QE has weaker distributional consequences compared with conventional monetary policy. Lastly, forward guidance and an extended period of zero policy rates amplified both the aggregate and the distributional effects of QE.

“The Effects of Monetary Policy on Consumption and Inequality” working paper [PDF]

Recent work with heterogeneous agent New Keynesian (HANK) models has shown that monetary policy shocks affect consumption mostly through a general equilibrium change in the real wage and have distinct distributional consequences. I show the fragility of these results, demonstrating how they depend on (1) the severity of wage rigidities and labor market frictions, (2) the cyclicality of profits, and (3) the progressivity of fiscal policy. I develop a HANK model that generates movements of the real wage and profits that are consistent with the data: in response to an expansionary monetary policy shock, profits increase and the real wage responds little. Indirect effects still dominate the direct effects of policy on consumption, as in Kaplan, Moll and Violante (2018). However, the effect on consumption through real wage changes is limited. Instead, a fall in unemployment risk contributes to a large increase in poor households' consumption, while an increase in profits leads to a significant response of wealthy households' consumption. Since both poor and wealthy households increase their consumption substantially, the distributional consequences of monetary policy shocks are much weaker than in previous work. What emerges instead is a hollowing out of the distribution, as middle-income households benefit the least. In contrast, in the flexible wage specification, the top quintile of the wealth distribution unambiguously loses, while the lower quintiles gain. Moreover, the distributional consequences depend crucially on fiscal policy. An expansionary monetary policy shock reduces inequality only when the government increases lump-sum transfers in response to a fall in the real value of government debt. When the fiscal authority adjusts government purchases or tax rates, welfare gains are larger for wealthier households.

“Income Inequality, Financial Intermediation, and Small Firms” with Sebastian Doerr and Thomas Drechsel, working paper [PDF]

This paper shows that rising top income shares among households reduce job creation by small firms. High-income households save relatively less in bank deposits and small firms depend on banks. We argue that more income accruing to top earners therefore reduces deposits that banks use to fund small businesses, thereby depressing job creation. We exploit variation in top incomes across US states and an instrumental variable strategy to establish that a 10 percentage point (p.p.) increase in the top 10% income share reduces the net job creation rate of small firms by 1.5–2 p.p., relative to large firms. The effect is stronger for smaller firms and in bank-dependent industries. Rising top incomes also reduce bank deposits and increase deposit rates, in line with a reduction in the supply of deposit. We then build a general equilibrium model with heterogeneous households that face a portfolio choice between high-return investments and low-return deposits that insure against liquidity risk. Banks use deposits to lend to firms of different sizes subject to information frictions. We study job creation across firm sizes under counterfactual income distributions.

“The Distributional Consequences of Raising the Inflation Target in a Heterogeneous Agent New Keynesian Model” with Jun Hee Kwak, work in progress

In recent decades, a secular decline has pushed the natural rate of interest to levels close to zero, increasing the risk that recessions will push nominal interest rates to the zero lower bound, limiting the effectiveness of conventional monetary policy. One potential remedy is to increase the inflation target to 4%. This paper assesses the effects of such a policy change on the economy using a heterogeneous agent monetary model with rigid wages and prices, procyclical profits, and a steady state wealth distribution that matches the current distribution in the United States. Preliminary results show that at the new steady-state with a higher inflation target, the economy accumulates less capital as a higher cost of price adjustments lowers the rate of return on investment. Moreover, the lower return on investment mainly reduces the welfare of wealthy households that are major claimants of profits. Thus, a higher inflation target reduces the level of wealth and income inequality. However, during the transition, the economy can experience an expansion with a higher level of capital if the central bank delays the required policy rate adjustments. The benefits from such an expansion tend to be larger for wealthier households. This is because a continuing and rapid increase in the inflation rate erodes the value of real wages, which hurts poor wage earners disproportionately. Hence, during the transition to a higher inflation target, wealth and income inequality can rise.