Essays in Macroeconomics and Stabilization Policy

Abstract

In the first essay, co-authored with Adriano Fernandes, we study the role of precautionary saving in heterogeneous-agent (HA) models. We first show that two calibrated versions of the model, one with standard and another with present-biased preferences, differ sharply in their predictions for precautionary saving. We then measure the response of asset accumulation to variation in unemployment insurance (UI) schedules across U.S. states as well as over time. We find small, statistically non-significant effects. Reproducing our empirical design using model-simulated data, we reject the standard model but not the present-biased one. We then study the stabilization properties of UI. In standard HA models, UI affects aggregate consumption largely by reducing precautionary saving. By weakening this effect, a model with present bias features 40% smaller fiscal multipliers of UI extensions. In the second essay, co-authored with Adrien Auclert, Matthew Rognlie, and Ludwig Straub, we show that, in a broad class of menu cost models, aggregate inflation dynamics in response to arbitrary shocks to marginal costs are nearly the same as in Calvo models. We first prove that the canonical menu cost model is first-order equivalent to a mixture of two time-dependent models, which reflect the extensive and intensive margins of price adjustment. We then show numerically that this mixture is well-approximated by a single Calvo model. Thus, the Phillips curve for a menu cost model looks like the New Keynesian Phillips curve but with a higher slope. In the third essay, co-authored with Roberto Rocha and Guilherme Silveira, we study the role of informal labor markets in shaping the dynamics of aggregate consumption in Brazil. We develop a job search model to study the interaction between the informal economy and business cycle volatility. We find that disruptions in informal labor markets generate larger drops in aggregate consumption, as informal workers have larger MPCs. However, the countercyclical behavior of the informal sector indicates that disruptions in formal labor markets are Brazil’s main drivers of unemployment. The informal labor market, therefore, insulates low-income, high-MPC workers from labor market fluctuations, contributing to stabilizing aggregate consumption.