Becker Friedman Institute
for Research in Economics
The University of Chicago

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

E32: Business Fluctuations; Cycles

Tax Cuts For Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment

Owen Zidar

This paper investigates how tax changes for different income groups affect aggregate economic activity. I construct a measure of who received (or paid for) tax changes in the postwar period using tax return data from NBER’s TAXSIM. I aggregate each tax change by income group and state. Variation in the income distribution across U.S. states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects.

How Credit Constraints Impact Job Finding Rates, Sorting & Aggregate Output

Kyle Herkenhoff, Gordon Phillips, Ethan Cohen-Cole

How does access to consumer credit affect the allocation of workers to firms, and what happens to sorting and the subsequent recovery if credit tightens during a recession? To answer this question, we develop a labor sorting model with saving and borrowing. We show that even with two-sided heterogeneity and risk aversion, the model remains tractable because it admits a unique block recursive solution. We find that if credit limits tighten during a downturn, employment recovers quicker, but output and productivity remain depressed.

The Effect of Unconventional Fiscal Policy on Consumption Expenditure

Francesco D'Acunto, Daniel Hoang, Michael Weber

Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We exploit a unique natural experiment for an empirical test of the effectiveness of unconventional fiscal policy. To comply with European Union law, the German government announced in November 2005 an unexpected 3-percentage-point increase in value-added tax (VAT), effective in 2007. The shock increased households’ inflation expectations during 2006 and actual inflation in 2007.

Aggregate Bank Capital and Credit Dynamics

Nataliya Klimenko, Sebastian Pfeil, Jean-Charles Rochet, Gianni De Nicolò

Central banks need a new type of quantitative models for guiding their financial stability decisions. The aim of this paper is to propose such a model. In our model commercial banks finance their loans by deposits and equity, while facing issuance costs when they raise new equity. Because of this financial friction, banks build equity buffers to absorb negative shocks. Aggregate bank capital determines the dynamics of credit. Notably, the equilibrium loan rate is a decreasing function of aggregate capitalization.

Inflation Expectations and Consumption Expenditure

Francesco D’Acunto, Daniel Hoang, and Michael Weber

Households that expect an increase in inflation have a 8% higher reported readiness to spend on durables compared to other households. This positive cross-sectional association is stronger for more educated, working-age, high-income, and urban households. We document these novel facts using German micro data for the period 2000-2013. We use a natural experiment for identification. The German government unexpectedly announced in November 2005 a three-percentage-point increase in value-added tax (VAT) effective in 2007.

Challenges for New Keynesian Models with Sticky Wages

Susanto Basu, Christopher L. House

Modern monetary business-cycle models lean heavily on price and wage rigidity. While there is substantial evidence that prices do not adjust frequently, there is much less evidence on whether wage rigidity is an important feature of labor markets in the real world. While real average hourly earnings are not particularly cyclical, systematic changes in the composition of employed workers and implicit contracts within employment arrangements make it difficult to draw strong conclusions about the importance of wage rigidity.

New methods for macro-financial model comparison and policy analysis

Volker Wieland, Elena Afanasyeva, Meguy Kuete, Jinhyuk Yoo

The global financial crisis and the ensuing criticism of macroeconomics have inspired researchers to explore new modeling approaches. There are many new models that aim to better integrate the financial sector in business cycle analysis and deliver improved estimates of the transmission of macroeconomic policies. Policy making institutions need to compare available models of policy transmission and evaluate the impact and interaction of policy instruments in order to design effective policy strategies.

Uncertainty, Financial Frictions, and Investment Dynamics

Simon Gilchrist, Jae W. Sim, Egon Zakrajˇsek

Micro- and macro-level evidence indicates that fluctuations in idiosyncratic uncertainty have a large effect on investment; the impact of uncertainty on investment occurs primarily through changes in credit spreads; and innovations in credit spreads have a strong effect on investment, irrespective of the level of uncertainty. These findings raise a question regarding the economic significance of the traditional “wait-and-see” effect of uncertainty shocks and point to financial distortions as the main mechanism through which fluctuations in uncertainty affect macroeconomic outcomes.

Globalization and Synchronization of Innovative Cycles

Kiminori Matsuyama, Iryna Sushko, Laura Gardini

We propose and analyze a two-country model of endogenous innovation cycles. In autarky, innovation fluctuations in the two countries are decoupled. As the trade costs fall and intra-industry trade rises, they become synchronized. This is because globalization leads to the alignment of innovation incentives across firms based in different countries, as they operate in the increasingly global (hence common) market environment.

Macro-prudential Policy in a Fisherian Model of Financial Innovation

Javier Bianchi, Emine Boz, Enrique G. Mendoza

The interaction between credit frictions, financial innovation, and a switch from optimistic to pessimistic beliefs played a central role in the 2008 financial crisis. This paper develops a quantitative general equilibrium framework in which this interaction drives the financial amplification mechanism to study the effects of macro-prudential policy. Financial innovation enhances the ability of agents to collateralize assets into debt, but the riskiness of this new regime can only be learned over time.