Browsing by Author "Bianchi, Francesco"

This dissertation consists of two essays in macroeconomics. In the first essay, I explain the increase in the interbank market credit spreads during the recent financial crisis using a model with endogenous default, in which banks with different default risk borrow at different interest rates. I compare a normal times stationary equilibrium and a crisis times stationary equilibrium. In normal times there is no spread in the interbank market, because the default probability of banks is zero. In crisis times some banks default, and an interbank credit spread arises endogenously. The interbank credit spread is positively correlated with leverage and debt size, and negatively correlated with expected cash flows. Using this framework, I study the effects of equity injections, debt guarantees, and liquidity injections on the interbank credit spreads and on risky projects financed by banks. I find that debt guarantees are effective in reducing interbank credit spreads in times of crisis, but not in stimulating investment. In contrast, interbank credit spreads are relatively unresponsive to injections of equity and of liquidity; however, these policies are successful in stimulating investment.

In the second essay, I study the capacity of the Taylor principle to guarantee determinacy in the class of New Keynesian models typically used for monetary policy analysis, when firms are not able to index their prices. In a model with labor, capital accumulation, capital adjustment costs, and capital utilization, the necessary conditions for trend inflation to affect determinacy are as follows: trend inflation is above 4%, firms are not able to index their prices, and the frequency of price changes is less than once a year. Introducing sticky wages, it is possible to find a response to inflation greater or equal than one that guarantees determinacy; however, the determinacy region is small and indeterminacy can arise even when the response to inflation is higher than one for one.

This dissertation consists of two chapters studying monetary and fiscal policy. In the first chapter, I study the welfare benefits and costs of increased central bank transparency in a dynamic model of costly information acquisition where agents can either choose to gather new costly information or remember information from the past for free. Information is costly to acquire due to an agent's limited attention. Agents face an intratemporal decision on how to allocate attention across public and private signals within the period and an intertemporal decision on how to allocate attention over time. The model embeds a coordination externality into the dynamic framework which motivates agents to be overly attentive to public information and creates the possibility of costly transparency. Interestingly, allowing for intratemporal and intertempral tradeoffs for attention amplifies (attenuates) the benefits (costs) of earlier transparency whereas it attenuates (amplifies) the benefits (costs) of delayed transparency.

The second chapter, co-authored with Barbara Rossi and Atsushi Inoue, studies the empirical effects of unexpected changes in government spending and tax policy on heterogeneous agents. We use data from the Consumption Expenditure Survey (CEX) to estimate individual-level impulse responses as well as multipliers for government spending and tax policy shocks. The main empirical finding of this paper is that unexpected fiscal shocks have substantially different effects on consumers depending on their age, income levels, and education. In particular, the wealthiest individuals tend to behave according to the predictions of standard RBC models, whereas the poorest individuals tend to behave according to standard IS-LM (non-Ricardian) models, due to credit constraints. Furthermore, government spending policy shocks tend to decrease consumption inequality, whereas tax policy shocks most negatively affect the lives of the poor, more so than the rich, thus increasing consumption inequality.

In this dissertation, I study how individual households respond to unanticipated changes in income. I focus on two recent fiscal programs, the Economic Stimulus Act (ESA) of 2008 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.

In the first chapter, I study the ESA. I demonstrate when Economic Stimulus Payments were being distributed to households, the macroeconomic environment was characterized by three main facts: (1) household income had yet to fall, (2) households were anticipating worsening economic conditions, and (3) consumer credit markets were already tightening. I modify the standard Permanent Income Hypothesis consumption-saving model to incorporate these three facts and assess the model's prediction for the household response to unanticipated income in the form of Economic Stimulus Payments. This modified model predicts that borrowing constrained households that receive the stimulus wish to increase consumption, but are forced to deleverage. Depending on the degree of indebtedness, size of the stimulus and recession, and size of the credit crunch, households may either increase or decrease consumption. Using micro-level household data from the Survey of Income and Program Participation, I find that consistent with the Permanent Income Hypothesis model, changes in behavior are most sensitive for households near their borrowing constraint. The empirical results suggest that constrained households used most of the stimulus to deleverage, but also increased spending. The more indebted is a household, the more likely it is to use the stimulus to repay debt, and the less likely it is to increase consumption or savings. This is inconsistent with the standard model but is consistent with the model incorporating the full macroeconomic environment in 2008.

In the second chapter, I study the CARES Act. As part of the Act, the IRS distributed $300 billion in Economic Impact Payments (EIPs) directly to US households. In the Census Bureau's Household Pulse Survey, almost 75% of households receiving an EIP reported using it to mostly pay for expenses. Separating respondents based on labor income interruptions, 84% of unemployed households reported mostly spending their EIPs, compared to 63% of employed households. I contribute to studying the trade-off between the timeliness and specificity of government transfer programs. Since the consumption responses for employed and unemployed households are similar, I conclude that a more targeted program at the expense of timeliness may not have have had a larger aggregate spending response. I find larger differences between households sorted on income, regardless of employment status, suggesting that income may be the more important determinant of EIP usage. Overall, I conclude that Economic Impact Payments played an important role in stabilizing aggregate spending.

In the final chapter, I build and estimate a quantitative model that generates a distribution of consumption responses similar to those observed in the data. I build and estimate a quantitative model of bounded rationality consistent with two motivating facts. First, highly liquid households have large consumption responses out of income shocks that cannot be driven by borrowing constraints. Second, larger income shocks induce smaller consumption responses and more intertemporal smoothing. In the model, a household responds to an income shock by reoptimizing over a planning horizon chosen to trade off benefits of consumption smoothing against cognitive planning costs. The optimal planning horizon is increasing in income, wealth, and the magnitude of the income shock. Estimated using the Economic Stimulus Act of 2008, the model implies that fiscal policies targeting more households with smaller payments induce less intertemporal smoothing and have the largest aggregate spending impact.