Research

Abstract:

This paper studies how income-level inflation rates vary over the course of the business cycle and documents two new facts: (1) during recessions, prices rise more for products purchased relatively more by low-income households (necessities); and (2) the aggregate share of spending devoted to necessities is counter-cyclical. I present a mechanism where adverse macroeconomic shocks which lower expenditure cause households to shift expenditure away from luxuries toward necessities, which leads to higher relative prices for necessities. I show empirically, with monetary policy and oil news price shocks, that this mechanism operates for both demand and supply shocks. For the oil price shock, I decompose the effect on relative prices into a direct effect and an indirect effect due to the fall in real expenditure; the indirect effect is responsible for nearly half of the oil price induced change in relative necessity prices. I embed the mechanism into a quantitative model which is able to explain around half of the cyclical variation in necessity prices and shares and finds that changes in relative prices makes a recessionary shock similar to the Great Recession 22 percent more costly for households in the lowest income quintile than the highest. The results suggest that low-income households are hit twice by recessions: once by the recession itself and again as their price index increases relative to that of other households. 

Abstract:

Macroeconomics has increasingly adopted tools from the applied micro “credibility revolution” to estimate micro parameters that can inform macro questions. In this paper, we argue that researchers should take advantage of this confluence of micro and macro to take the credibility revolution one step further. We argue that researchers should assess the plausibility of the micro estimates and macro models by constructing macro counterfactuals for historical periods and comparing these counterfactuals with reasonable benchmarks. We illustrate this approach by conducting a case study of the 2001 U.S. tax rebates, as well as briefly summarizing two previous applications of the methodology. In the 2001 rebate case, we calibrate a two-good, two-agent New Keynesian model with the leading estimates of the household marginal propensity to consume (MPC) out of the rebates to construct a counterfactual path for nondurable consumption. The counterfactual path implies that without the tax rebate nondurable consumption spending would have fallen dramatically in the late summer and fall of 2001. Using forecasting regressions and other evidence, we argue that this counterfactual is implausible. When we investigate the source of the discrepancy, we find that the leading MPC estimates are not representative of the response of total consumption.

Abstract:

Black mothers are 60 percent more likely than white mothers to have preterm births and twice as likely to have a baby with low birth weight. We examine whether these black-white gaps in birth outcomes are larger in counties with higher levels of racial prejudice. We use data from the restricted-use natality files in the United States, which provide information on birth weight, gestation, and maternal characteristics for over 31 million births from 2002 to 2012, combined with county-level data measures of both explicit and implicit racial prejudice from Project Implicit from over a million individuals who took the Implicit Association Test during this same period. We compare counties that are one standard deviation above the mean (high prejudice) with those that are one standard deviation below the mean (low prejudice) in terms of their average level of racial prejudice. The black-white gap in low birth weight is 14 percent larger in counties with high implicit racial prejudice compared to counties with low prejudice. The black-white gap in preterm births is 29 percent larger in the high prejudice counties. The gaps are even larger when we use explicit measures of racial prejudice with high prejudice counties having a black-white gap that is 22 percent larger for low birth weight and 36 percent larger for preterm births. These relationships do not appear to be biased by the way the prejudice sample is constructed, since the racial gap in birth outcomes is unrelated to other county-level biases such as those based on gender or sexual orientation. The black-white gap in United States’ birth outcomes is larger in those counties that have the highest levels of racial prejudice. This is true for both implicit and explicit racial prejudice, though the strength of the relationship is strongest for explicit racial prejudice.

Abstract:

We present evidence that the high estimated MPCs from the leading household studies result in implausible macroeconomic counterfactuals.  Using the 2008 tax rebate as a case study, we calibrate a standard medium-scale New Keynesian model with the estimated micro MPCs to construct counterfactual macroeconomic consumption paths in the absence of a rebate. The counterfactual paths imply that consumption expenditures would have plummeted in spring and summer 2008 and then recovered when Lehman Brothers failed in September 2008. We use narratives and forecasts to argue that these paths are implausible.  We then show that standard two-way fixed effect estimates of the micro MPCs are upward biased. When we correct for the biases, we estimate smaller micro MPCs than the previous literature. We also show that reasonable modifications of the model result in general equilibrium forces that dampen rather than amplify micro MPCs. The combination of smaller micro MPCs and dampening general equilibrium forces implies general equilibrium consumption multipliers that are below 0.2.

Abstract:

This project postulates that an additional cost of increased inflation is an increase in the cross-sectional dispersion of household-level inflation rates. Using scanner data and the Consumer Expenditure Survey, I construct novel measures of household-level inflation and show that households experience inflation at very different rates. An increase in a household's personal inflation rate leads to a persistent increase in their price index. Households respond to a personal inflation shock by decreasing nominal consumption, which means that real consumption falls more than one-for-one; poor households are least able to smooth their consumption in response to household inflation shocks. I find that inflation dispersion (the variance of household inflation rates) increases with the level of absolute aggregate inflation. This relationship is robust across time, methodology, and data.