Macroeconomics

Insurance and macro models, increased capital risk results in higher risk free asset prices often attributed to precautionary saving. However at the demand level, even assuming the same preferences as in the equilibrium analysis, precautionary saving need not always hold. Assuming CES time and CRRA risk preferences, we derive conditions such that the consumer exhibits precautionary savng. Absent these conditions, a concrete example demonstrates that the consumer fails to exhibit precautionary saving.

The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no‐arbitrage restriction in the United States. Both cyclical and long‐run dynamics of tax revenues and government spending make the surplus claim risky. In a realistic asset pricing model, this risk in surpluses creates a large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasuries may be overpriced.

While the broader Inflation Reduction Act will substantially cut carbon emissions, the new tariffs on Chinese EVs will have the opposite effect. They risk derailing the transition to EVs, and they pit U.S. middle-class consumers against auto workers and shareholders.

We develop a financial-economic model for carbon pricing with an explicit representation of decision making under risk and uncertainty that is consistent with the Intergovernmental Panel on Climate Change’s sixth assessment report. We show that risk associated with high damages in the long term leads to stringent mitigation of carbon dioxide emissions in the near term, and find that this approach provides economic support for stringent warming targets across a variety of specifications.

We propose a political economy mechanism that explains the presence of fiscal regimes punctuated by crisis periods. Our model focuses on the interaction between successive deficit-biased governments subject to i.i.d. fiscal shocks. We show that the economy transitions between a fiscally responsible regime and a fiscally irresponsible regime, with transitions occurring during crises when fiscal needs are large. Under fiscal responsibility, governments limit their spending to avoid transitioning to fiscal irresponsibility.

“Clean growth” versus “degrowth” is a highly contentious political debate. It ought not to be.

And the U.S. Inflation Reduction Act is surprisingly well-designed to deal with the fallout.