Essays in Macroeconomics with Heterogeneous Households: Consumption, Income Risk, and Government Debt

Abstract

This thesis studies three topics related to household heterogeneity in macroeconomics. In the first chapter, co-authored with Pierfrancesco Mei and Prof. Stefanie Stantcheva, I study how and why households adjust their spending, saving, and borrowing in response to transitory income shocks. I leverage new large-scale survey data to quantitatively assess households’ intertemporal marginal propensities to consume (MPCs) and deleverage (MPDs) (the “how”) and to examine households’ motivations and decision-making processes (the “why”). My findings are as follows. First, I provide evidence that surveys can reliably predict actual economic behavior by comparing responses to hypothetical financial scenarios with observed actions in past studies. Participants’ predicted reactions closely align with real-life behavior. Second, I show that MPCs are higher immediately after an income shock and decline over time, with substantial variation in cumulative MPCs over a one-year horizon. I also show that MPDs play a critical role in household financial adjustments. The heterogeneity in both MPCs and MPDs is not easily explained by socioeconomic or financial characteristics alone, but is better accounted for once psychological factors, past experiences, and expectations are incorporated. Third, using specifically designed survey questions, I document a broad range of motivations behind households’ financial decisions. Based on these motivations, I identify four household types using machine learning: Strongly Constrained, Precautionary, Quasi-Smoothers, and Spenders. Similar financial actions stem from diverse motivations, challenging the predictability of financial behavior based solely on socioeconomic and financial characteristics. Finally, I use these findings to address several puzzles in household finance. In the second chapter, co-authored with Prof. Tommaso Monacelli, I provide micro-data evidence on heterogeneous perceptions of household income risk. I develop an incomplete information framework with Bayesian learning to provide a micro-foundation for heterogeneity in perceived income risk. I then study the determinants of aggregate fluctuations and the monetary and fiscal policy multipliers in a New Keynesian model with heterogeneous perceptions of income risk. I obtain three main results. First, MPCs are heterogeneous because perceived income risk responds differently to earnings realizations across the income distribution. Second, the response of aggregate output to demand shocks hinges crucially on how perceived income risk co-varies with the cyclicality of individual income across the income distribution. Third, the general equilibrium effects of monetary and fiscal policy can be summarized by a set of observable cross-sectional sufficient statistics. Conditional on the estimated signs of these statistics, heterogeneity in perceived income risk amplifies the response of output to demand shocks. In the third chapter, I study the optimal level of government debt in a stylized heterogeneous agents open economy model. First, I show that a Ramsey planner faces a key trade-off between providing liquidity to domestic agents and manipulating interest rates to extract monopoly rents from foreign agents holding domestic debt. Second, I derive necessary conditions to characterize the optimal level of debt and interest rates. The planner optimally sets lower interest rates than in the closed-economy first best in order to reduce interest payments to foreign agents. This trade-off intensifies when foreign demand for domestic debt is more inelastic. Finally, I show that the planner can achieve the first-best allocation by issuing two separate debt instruments to domestic and foreign agents.