The permanent-income hypothesis predicts consumption is proportional to permanent income, yet empirical elasticities are far below one.
I provide evidence that this under-response reflects consumption commitments---hard-to-adjust goods that lock households into past choices.
Four facts support this mechanism: consumption elasticity (i) declines with age, (ii) depends negatively on past permanent income growth,
(iii) exhibits path-dependent expenditure composition toward easy-to-adjust goods, and (iv) all path dependences disappear among households
that recently adjusted commitments. I use a quantitative life-cycle model to show that commitments are necessary to generate the age decline
and history dependence. However, commitments are not sufficient to explain the average under-response; bequest motives and late-in-life luxury
consumption are also quantitatively important. The calibrated model matches both micro consumption responses and aggregate wealth inequality.
Hours worked rise sharply in the first decade after labor-market entry.
We show that this growth is primarily an intensive-margin phenomenon driven
by human-capital incentives: about 60\% of the increase in cumulative hours
reflects longer workweeks among employed workers, not additional weeks worked.
To reach this conclusion, we estimate a life-cycle model with learning-by-doing
and on-the-job search using quarter-since-entry profiles constructed from
the NLSY79 and NLSY97. The model replicates the joint dynamics of hours,
wages, employment, and job mobility from the moment workers leave school.
In the estimated model, the return to current hours operates not only
through future wages but also through improved job stability and access
to better outside offers. A decomposition of wage inequality shows that
the growing covariance between human capital and match quality accounts
for the majority of the rise in wage variance over the first 20 years
after entry.
We study the long-term consequences of maternal unemployment on children's labor market outcomes. Using the NLSY, we show that children exposed
to maternal unemployment during childhood have lower wages and employment probabilities as adults. These effects remain even after controlling
for family income, indicating that income loss alone cannot explain the observed scarring effects. Our results suggest that (i) greater parental
time availability does not mitigate the damage and (ii) non-income channels play a key role. Finally, we find that the negative effects are
concentrated in adolescence, with maternal unemployment during these years leading to earlier labor force entry and reduced educational attainment.
We propose a model to study an inflation-targeting regime under a high government debt burden. We assume that an altruistic policymaker chooses debt issuance,
inflation, and public expenditure, while private agents dislike inflation and finance the government. We show that equilibrium inflation depends on debt level:
(1) on-target when debt is low; (2) above the target when debt is high; (3) either above or on-target in between, a zone that we named fiscal fragility.
Equilibrium inflation also depends on the target level: a higher target may improve welfare by preventing fiscal fragility and reducing debt-rollover costs.
We estimate cyclicality in labor's user cost allowing for cyclical fluctuations in the quality of worker-firm matches and wages that are smoothed within employment matches.
To do so, we exploit a match's long-run wage to control for its quality. Using NLSY data for 1980 to 2019, we identify three channels by which recessions affect user cost:
It lowers the new-hire wage; it lowers wages going forward in the match; but it also results in higher subsequent separations. All totaled, we find that labor's user cost
is highly procyclical, increasing by more than 4% for a 1 pp decline in unemployment.
Current Constraints on Growth
(with Armando Castelar Pinheiro),
in Antonio Spilimbergo and Krishna Srinivasan (eds.),
Brazil: Boom, Bust, and the Road to Recovery, IMF, March 2019.
[Book]
Work in Progress
Firm Stochastic Discount Factors Over the Business Cycle (with Lorenz Ekerdt and Kai-Jie Wu)
Wedge-Accounting in Multi-Sector Models (with Eugenio González Flores and Gian Paulo Soave).