with Fergal Hanks

Models of lumpy capital adjustment are too responsive to interest rates relative to empirical evidence. We argue that allowing for small convex adjustment costs in labour can help these models better match the data. Convex costs cause labour to increase slowly in response to a shock thus smoothing out the impact on the marginal product of capital. Due to both depreciation and uncertainty over future productivity, this delay in the benefits of additional capital can have a large impact on the responsiveness of capital investment.

with George-Marios Angeletos

We study the implications of rationally inattentive behavior for the design of optimal taxes. Our main finding is an irrelevance result– when inattention satisfies two key properties, “invariance” and “state separability”, optimal taxes satisfy exactly the same type of sufficient-statistics formula as that found in classical public finance. Away from this benchmark, inattention can lead to novel considerations for the design of optimal taxes. First, violations of state-separability generate interdependence of the optimal taxes across states. Second, violations of invariance help accommodate the idea that market may be excessively complex, even when firms are perfectly competitive. Finally, we clarify that inattention does not necessarily make agents less responsive and may thus call for lower taxes.

Draft coming soon!

with Guido Lorenzoni

A simple model is used to study the effects of tariffs on the current account balance when a country runs permanent trade deficits. The models features a simple form of “exorbitant privilege” that allows a country to run a permanent and sustainable current account deficit. Unlike in models based on a traditional intertemporal approach, tariffs do not affect saving through their effects on the real interest rate, and do not dampen current account imbalances.

Draft coming soon!