A theory of Firm Wage Dynamics (joint with Masao Fukui)
We develop a theory of firm wage dynamics that integrates the canonical wage-posting model à la Burdet Mortensen 1998 with firm dynamics. Firms offer dynamic wage contracts under an equal-treatment constraint in the presence of search frictions. We provide an analytical characterization of equilibrium wage contracts and firm growth as functions only of the distribution of marginal surplus. Consistent with recent empirical evidence, the model implies that (i) firm wages are strongly linked to firm growth but not to firm size; (ii) young firms pay higher wages than old firms; and (iii) the pass-through of productivity shocks to wages is higher in the short run than in the long run. Firms at the top of the job ladder face excessive labor market competition, so the optimal policy subsidizes their hiring. At the macro level, the optimal policy elevates business dynamism in the steady state, and even more so along the transition.
The Welfare Cost of Inflation Risk (with Tomás Caravello)
When borrowing and lending occur in nominal terms, inflation shocks redistribute wealth among agents. The prospect of these shocks reduces welfare ex-ante by exposing both sides to risk and distorting financial trade. We show that heterogeneity and incomplete inflation indexation are necessary for inflation risk to matter for welfare through this channel, and that the cost is governed by two key moments: the size of nominal positions and the inflation risk premium. The same ingredients generate a positive inflation risk premium even when inflation and aggregate consumption are uncorrelated, consistent with recent U.S. data. We quantify this mechanism in a heterogeneous-agent economy calibrated to match key asset-pricing and macro moments. Eliminating inflation risk yields aggregate welfare gains of about 0.45% of perpetual aggregate consumption, comparable to estimates of the welfare costs of trend inflation due to transaction or price-setting frictions.
Currency Pegs, Trade Deficits and Unemployment: A Reevaluation of the China Shock (with Masao Fukui and Bumsoo Kim)
We develop a dynamic quantitative model of trade and labor adjustment, incorporating nominal wage rigidity and consumption–saving decisions, to study how China’s currency peg interacted with its rapid growth in shaping the US economy. We show that the peg temporarily boosts China’s export growth by preventing an appreciation of the Chinese currency, thereby amplifying the US labor-market consequences of the China shock. At the same time, the temporary export boom increases China’s savings and leads to a larger US trade deficit. Calibrating the model to match trade and labor-market flow data, we find that China’s currency peg played a quantitatively important role in the US manufacturing decline, the widening US trade deficit, and unemployment dynamics. These results underscore the importance of exchange-rate adjustment (or the lack thereof) for understanding trade shocks. We also find that the overall welfare impact of the China shock remains significant and positive.
Agnostic Dynamic Programming (with Tim de Silva)
nndp package developed for the paper
Traditional dynamic programming requires a mathematical model of the transition function for the state vector. Leveraging reinforcement learning techniques, we develop a framework to solve dynamic optimization problems that does not require modeling the data-generating process (DGP) of exogenous states. Instead, the method samples realizations of these states directly from the data, allowing the modeler to be “agnostic” about the DGP. We apply our method to a canonical life cycle consumption-saving problem, solving the model without specifying the DGP for income. Using income data from the CPS, we find that the welfare loss from using a standard parametric income process relative to placing no restrictions on the DGP is small.
Phillips Curve and Optimal Monetary Policy Targets under Imperfect Labor Reallocation (joint with Bumsoo Kim and Masao Fukui)
Inflation and income redistribution: evidence from tax data from 1969 to the present (with Stavros Panageas, Dimitris Papanikolaou, John Rothbaum, Lawrence Schmidt)
“Sowing the Wind” Monetary Policy by Jonathan Goldberg David Lopez-Salido