What is the best macroprudential regulation when households differ in their exposure to profits from the financial sector? To answer the question, I study a real business cycle model with household heterogeneity and market incompleteness. In the model, shocks are amplified in states with high leverage, leading to lower investment. I consider the problem of a Ramsey planner who can finance transfers with a distortive tax on labor and levy taxes on the balance sheet components of experts. I show that the optimal tax on capital purchases is zero and the optimal policy relies mostly on a tax on deposit issuance. The latter redistributes between agents by affecting the equilibrium rate on deposits. The welfare gains from optimal policy are due to both redistribution and insurance and are larger the more unequal the initial distribution is. A simple tax rule that targets a level of leverage can achieve most of the welfare gains from optimal policy.
We develop a continuous-time model with heterogeneous agents and financial intermediaries in order to study the uneven distributional effects of financial shocks. In the model, wealthier agents optimally choose to be more exposed to profits from the financial sector by holding illiquid assets. Equilibrium choices of assets and investment depend not only on banking conditions but also liquidity demand from households. We estimate the model using Bayesian techniques based on the sequence-space Jacobian approach and study the effects of various policy interventions on macro aggregates and inequality.
Work in Progress
“Estimating a Model of Supermarket Pricing in the U.S.”
I use the framework developed by Thomassen et al (2017) to study supermarket competition in the US. I estimate the structural model of multi-firm multi-category demand using rich purchases data from the Nielsen Consumer Panel and affirm that accounting for cross-category effects is crucial in estimating market power. I use the model to perform merger analysis both for retail chains that operate in similar categories and those whose product ranges differ.
“Optimal Policy Under Strategic Uncertainty” (with Yu-ting Chiang)