Working papers

Abstract: We revisit the link between the risk of sovereign default and default costs. Higher costs of default may result in higher default probabilities, lower bond prices, and fiscal limits that are not pinned down by economic fundamentals. The feedback between private investment and government debt sustainability can result in multiple equilibria. In `bad' equilibria, investors expect default and low capital returns; low investment tightens future fiscal constraints and reduces the probability of debt repayment, validating investor pessimism. In `good' equilibria, optimistic investors choose higher capital; this results in higher fiscal surpluses, raises probability of debt repayment and validates investor optimism.

current version

Abstract: This paper considers 1244 estimates of marginal propensities to consume (MPC) out of stimulus checks and other small transitory or predictable payments. I use meta-regressions to uncover the sources of systematic variation in estimates. An increase in unemployment by one percentage point is associated with MPC that is higher by 4-5 percentage points. MPC estimates decrease with the size of the payments.  MPCs are lower for households holding ample liquidity. MPCs out of stimulus checks are higher than those out of some recurring payments. These results highlight the importance of considering state-dependent multipliers, two-asset models, liquidity constraints, near rationality, and mental accounting.

current version

Abstract: When nearby regions have different tax rates, residents may travel to shop in the lower tax rate region. The extent of this activity is captured by the tax elasticity of border sales (TEBS). We collect 749 estimates of TEBS reported in 60  studies, and conduct the first meta-analysis of this literature.  We show that the literature is prone to selective reporting: positive estimates are systematically discarded.  Sales of food, retail and fuel are more elastic compared to sales of tobacco and other individual `sin' products. Cross-border shopping is more prominent in the US---compared to Europe and other countries.

current version

Work in progress 


Abstract: We examine 994 estimates of the effects of IMF programs on economic growth as reported by 36 studies. The mean reported effect is positive, but the estimates vary widely. We use meta-regression analysis to disentangle sources of this variation, addressing model uncertainty with Bayesian Model Averaging and LASSO. We find that estimates vary systematically depending on data and methods employed by the researchers. Reported effects of IMF programs tend to be more positive for samples that include countries with high levels of institutional and economic development, when measured on longer horizons or obtained with the propensity score matching technique. Estimates appear to depend on the types of IMF programs being considered, as general resource programs tend to result in less favorable growth outcomes compared to programs that lend from concessional resources. Estimates tend to be lower when the underlying data includes more programs from the 1980s. Authors with IMF affiliation tend to report estimates that are somewhat higher than those of outside researchers.

Abstract: When jobs offered by different employers are not perfect substitutes, employers gain wage-setting power; the extent of this power can be captured by the elasticity of labor supply to the firm. The authors collect 1,320 estimates of this parameter from 53 studies. Findings show a prominent discrepancy between estimates of direct elasticity of labor supply to changes in wage (smaller) and the estimates converted from inverse elasticities (larger), suggesting that labor market institutions may rein in a substantial amount of firm wage-setting power. This gap remains after they control for 22 additional variables and use Bayesian Model Averaging and LASSO to address model uncertainty; however, it is less pronounced for studies employing an identification strategy. Furthermore, the authors find strong evidence that implies the literature on direct estimates is prone to selective reporting: Negative estimates of the elasticity of labor supply to the firm tend to be discarded, leading to upward bias in the mean reported estimate. Additionally, they point out several socioeconomic factors that seem to affect the degree of monopsony power.

Abstract: We show that three factors combine to explain the mean magnitude of excess sensitivity reported in studies estimating the consumption response to income changes: the use of macro data, publication bias, and liquidity constraints. When micro data are used, publication bias is corrected for, and households under examination have substantial liquidity, the literature implies little evidence of deviations from consumption smoothing. The result holds when we control for 45 additional variables reflecting the methods employed by researchers and use Bayesian model averaging to account for model uncertainty. The estimates produced by this literature are also systematically affected by the size of the change in income and the chosen measure of consumption.

Abstract: We examine 597 estimates of habit formation reported in 81 published studies. The mean reported strength of habit formation equals 0.4, but the estimates vary widely both within and across studies. We use Bayesian and frequentist model averaging to assign a pattern to this variance while taking into account model uncertainty. Studies employing macro data report consistently larger estimates than micro studies: 0.6 vs. 0.1 on average. The difference remains 0.5 when we control for 30 factors that reflect the context in which researchers obtain their estimates, such as data frequency, geographical coverage, variable definition, estimation approach, and publication characteristics. We also find that evidence for habits strengthens when researchers use lower data frequencies, employ log-linear approximation of the Euler equation, and utilize open-economy DSGE models. Moreover, estimates of habits differ systematically across countries.

Abstract: This paper studies the monetary policy trade-off between low inflation and low sovereign risk in the environment where fiscal authorities fail to fully ensure the sustainability of government debt. Building on the Fiscal Theory of Price Level (FTPL) and the Fiscal Theory of Sovereign Risk (FTSR), this paper differs in its baseline assumption about the monetary policy objective, which is neither to rule out defaults regardless of inflation costs (as in FTPL), nor to follow inflation targeting regardless of associated sovereign risk (as in FTSR). Instead, we study the case in which the central bank controls the risky interest rate to minimize the probability of default while ruling out large inflation hikes. We show that this policy regime can mitigate default risks only when the central bank is expected to allow sufficient increases in inflation. When agents believe that the central bank's tolerance toward inflation hikes has increased, equilibrium risk premium goes down, suggesting that information concerning changes in the central bank's preferences over inflation directly impacts default risks.