I am excited to post a new working paper with Georgios Nikolakoudis and Gianluca Violante called Price Level and Inflation Dynamics in Heterogeneous Agent Economies. The paper explores the role of precautionary savings, MPC heterogeneity and redistribution in driving inflation by extending the Fiscal Theory of the Price Level to a Bewley economy. One advantage of the heterogeneous agent setting over the representative agent setting is that the economy admits a steady-state in which government run persistent deficits. We quantify the maximum sustainable deficit for the United States and show that it depends on the progressivity of the tax and transfer system.

Finally, a completely revised version of Markups, Labor Market Inequality and the Nature of Work with Piotr Zoch.

Gianluca Violante and I finally have a draft of our paper with with on The Marginal Propensity to Consume in Heterogeneous Agent Models. This paper is forthcoming in Annual Reviews of Economics. We conduct a systematic investigation of models with different preferences, dimensions of ex-ante heterogeneity, income processes and asset structure, and show that the most important factor determining the average MPC is the share and type of hand-to-mouth households.

I recently recorded a podcast for the Global Perspectives Policy Podcast at The University of Sydney. In it we discuss my journey from growing up in Sydney to becoming an Economics Professor in Chicago, the history of heterogeneous agent macroeconomics and my recent work applying the heterogeneous agent framework to study the distributional consequences of the COVID-19 pandemic and associated lockdown policies. You can find the full podcast here.

My work with Ben Moll and Gianluca Violante on the distributional consequences of alternative policy responses to the COVID-19 pandemic “The Great Lockdown and the Big Stimulus: Tracing the Pandemic Possibility Frontier for the U.S.” is now available as a BFI working paper here. We have also produced a non-technical summary of the paper, and summaries of corollary output on exposure and vulnerability to the pandemic by occupation, the economic welfare effects of the CARES Act, and taxation-based alternatives to lockdowns.

A number of updates:

• A draft of my recent work with Ben Moll and Gianluca Violante on the distributional consequences of alternative policy responses to the COVID-19 pandemic is finally available: “The Great Lockdown and the Big Stimulus: Tracing the Pandemic Possibility Frontier for the U.S.” . In order to avoid taking a stand on the economic value of a life, we advocate the use of distributional Pandemic Possibility Frontier (PPF) for evaluating the trade-offs between lives and livelihoods associated with different policies. The non-linearity of the PPF can help reconcile different views in the current debate over the existence of a trade-off when considering lockdowns of different lengths. Under all policies that we consider, the economic costs are large and heterogeneous. This heterogeneity arises from the fact that households whose earnings are most exposed to the pandemic (those in social occupations with low capacity to work from home) are also the most financially fragile. Targeted policies such as Pigouvian taxes on on-site work and socially intensive consumption, with appropriately designed rebates can greatly flatten the PPF and deliver lower economic costs for the same loss in lives.

• My paper with Andreas Fuster and Basit Zafar “What Would You Do With $500? Evidence from Gains, Loss, News and Loans” is now forthcoming in Review of Economic Studies.

• My paper with Felipe Alves, Ben Moll and Gianluca Violante “A Further Look at the Propagation of Monetary Policy Shocks in HANK” is now forthcoming in Journal of Money, Credit and Banking (25th anniversary issue).

I have a new paper with Steve Bond, Arshia Hashemi and Piotr Zoch called Some Unpleasant Markup Arithmetic: Production Function Elasticities and their Estimation from Production Data. We highlight some commonly overlooked issues about the identification and estimation of markups using the ratio estimator - the ratio of the output elasticity of a variable input to that input’s cost share in revenue. This is the estimator that has underpinned a recent literature that seeks to estimate heterogeneity and trends in markups. Most importantly, we show that it is essential that one uses an output elasticity, as opposed to a revenue elasticity, in the numerator of the ratio estimator. When the revenue elasticity is used, then the ratio estimator contains no information about markups at all. We then show that without data on output quantities (as opposed to sales or revenue) it is not possible to obtain consistent estimates of the output elasticity, and hence markups, using any current methods, when firms have market power and there is heterogeneity in markups

Here is a new working paper with Piotr Zoch titled Markups, Labor Market Inequality and the Nature of Work. We develop framework for thinking about how changes in markups affect the labor income distribution. Our approach hinges on a distinction between two uses of labor in modern economies: the traditional use of labor for production, versus alternative uses of labor for overhead, marketing and other expansionary activities. We use our framework to assess the impact of changes in markups on the overall labor share and on labor income inequality across occupations. We identify the production and expansionary content of different occupations from the co-movement of occupational income shares with markup-induced changes in the labor share. We find that around one-fifth of US labor income compensates expansionary activities, and that occupations with larger expansionary content have experienced the fastest wage and employment growth since 1980. Our framework can rationalize a counter-cyclical labor share in the presence of sticky prices and can be used to study the distributional effects of demand shocks, monetary policy and secular changes in competition. You can find the working paper here, and a non-technical summary here.