Macroeconomics

We propose one route to a more inclusive society. Our context is the prevailing one of high wealth inequality where stockholders alone supply the stochastic discount factor governing the allocation of capital. A large and pervasive pecuniary externality is thus imposed on non-stockholder workers, something we view as antithetical to the notion of an inclusive society.

We develop a framework to measure the welfare impact of macroeconomic shocks throughout the distribution. The first-order impact of a shock is summarized by the induced movements in agents’ feasible sets: their budget constraint and borrowing constraints. We combine estimated impulse response functions with micro-data on household consumption bundles, asset holdings, and labor income for different US households. We find that inflationary oil shocks are regressive, but monetary expansions are progressive, and there is substantial heterogeneity throughout the life cycle.

Significance: Estimating the social cost of carbon (SCC)—the cost of one additional ton of CO2 emitted—is crucial for the analysis of climate change policies. Despite numerous recent studies investigating how fundamental aspects of model structure affect SCC evaluation, findings are scattered, making the relative importance of different modeling elements hard to establish. This paper synthesizes results from the published literature over the last 20 y, revealing a wide range of SCC estimates.

In …nance 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.