This project examines how increasing labor market polarization affects the transmission of monetary policy. Specifically, Morrison will examine how heterogeneity in worker substitutability with capital affects the role the labor market plays in the transmission of monetary policy. The research will estimate the importance of a heterogeneous worker-capital substitutability channel of monetary policy—investment spurred by monetary policy will have muted effects on aggregate consumption if workers whose labor is complementary with capital tend to have lower marginal propensities to consume. To investigate this phenomenon, she first plans to build and solve a model that captures this effect, then estimate the impulse-response functions of wages of workers in various skill categories to unexpected expansionary monetary shocks.

Central banks across the developed world are reconsidering their monetary policy frameworks and are frequently looking to academic research to inform the question of whether to stick with the dominant paradigm of inflation targeting or to adopt a new monetary policy regime. To address this question, Halperin and Caratelli will build a model where price stickiness is modeled in a substantially more realistic way, compared to other models, in order to explore whether it is optimal for central banks to use nominal income targeting rather than inflation targeting. The two researchers will examine whether nominal income targeting would mean that central banks would not have to tighten policy in response to strong wage growth, which could boost equitable growth.

Progressive taxation is highly polarized in the United States because some states have millionaire taxes while others have no state income tax at all. The 2017 tax reform legislation, the Tax Cuts and Jobs Act, amplified these differences by capping the state and local tax, or SALT, deduction. This effectively reduced top tax rates in some states while increasing them in others, leading some, including governors, to worry that this new tax differential will set off a wave of millionaire tax flight and a new “race to the bottom” in state taxes on the rich. Using confidential data from IRS tax returns, the author will examine elite mobility and embeddedness in the wake of the 2017 tax reform. The author seeks to understand if the rich are more likely to move when their tax rates are high, whether the TCJA-induced tax differential led to greater migration, and, conditional on moving, how much this tax reform increased the likelihood that moves are to lower-tax destinations. These questions are of great importance as state and local taxes are essential for states’ capacity to provide services and alleviate inequality. And while previous work shows the existence of effects among particular job classes, this paper would provide policy-relevant estimates for the universe of high-earners in recent U.S. history.

When humans undertake physically intensive tasks, the body must release heat to maintain a safe internal temperature. Worker safety organizations have strict guidelines for climate conditions under which it is safe for workers to perform strenuous manual labor. Rising temperatures from climate change will increase the risk of heat stress, making outdoor work more difficult. This study seeks to quantify these implications for capital accumulation, growth, and consumption by building a discrete time growth model of a closed economy. Unlike standard climate-economy models, Casey, Fried, and Gibson will account for differences in the way that climate affects the production of investment goods and services, compared to consumption goods and services. The model is designed to capture how vulnerability to climate change differs between consumption and investment sectors and how this difference evolves over time. It builds on past work by considering climate change as a determinant of productivity and considering a more disaggregated representation of the economy.

U.S. unemployment due to the onset of the coronavirus pandemic was widespread, as was U.S. economic insecurity. In terms of consumption, aggregate retail sales fell by 16 percent in April 2020, the largest fall on record. While retail spending recovered by mid-July, spending on services remained significantly depressed. In contrast to aggregate spending and U.S. labor market data, there is little real-time data on the impact of the coronavirus pandemic on consumer spending inequality. This project will use a new transaction-level, real-time dataset from Earnest Research to measure consumer spending inequality in the United States and assess the impact of the pandemic on consumption inequality. The dataset contains information on a panel of 6 million households and is updated with a delay of just 1 week. Abdelwahed and Robbins will be able to study the outflows of spending, as well as the inflows of payments from wages and salaries, stimulus payments, and other government transfers into the households’ accounts, allowing them to construct a series on various ratios of spending between the top and bottom percentiles in order to study changes in consumer spending inequality along the distribution. They will also measure the effects of the pandemic on consumption of those who lost their jobs or experienced lower incomes and will compare them to individuals who retained their jobs. Abdelwahed and Robbins will estimate the impact of government stimulus payments and Unemployment Insurance on consumer spending inequality and consumption patterns. The data will be released publicly at the aggregate level at both the state and county levels, and the two researchers plan to release quarterly reports, providing other researchers and policymakers with a valuable new data source.

The 2008 global financial crisis outlined the need for a policy toolkit that lessens the pain of financial cycles for the real economy. In particular, conventional macroeconomic policies undertaken by public authorities in the aftermath of the crisis lead to extremely low interest rates and put public finances under heavy strain. During this period, macroprudential regulation established itself as a new cornerstone of regulators’ toolkits. Yet most models evaluating the potential benefits from macroprudential regulation consider redistribution as a side effect by using representative agent models. This project asks whether the redistribution channel calls for stronger or weaker macroprudential regulations, how the effectiveness of prudential capital controls as a financial stability tool are affected by the distribution of income, and what the distributional implications are of prudential regulations. The authors will build on existing research that presents models showing that monetary policy may impact income inequality in ways that then turn out to affect the transmission mechanism for such policy. First, they will be extending models that focus on the closed economy context to the open economy context. Second, they will be providing both a theoretical and a quantitative analysis of the transmission channels associated with capital controls. Third, they will perform their analysis in a dynamic context.