Working Papers
The Macroeconomic Effects of Defense Spending News
(JMP)
with Ethan McClure
Abstract: We estimate the macroeconomic effects of government spending by constructing a new series of defense spending surprises using a high-frequency identification approach. We identify events in the U.S. federal budget process that reveal news about defense spending, focusing on dates when different versions of defense appropriations bills are passed in the House or the Senate. We then quantify the defense spending surprise associated with each event using daily stock returns of large U.S. defense contractors. A positive defense spending surprise predicts a persistent increase in future defense spending that is entirely passed through to total government spending. On average, the identified spending increases are financed with a combination of taxes and debt, and are met with a muted monetary policy response. We estimate the dynamic causal effects of defense spending and find sizable increases in output and consumption. Our estimates imply a cumulative fiscal multiplier—the cumulative output response divided by the cumulative spending response—of 1.2 over a five-year horizon. Our results indicate that government spending stimulates (`crowds in”) economic activity in the private sector. A standard heterogeneous-agent New Keynesian model can match our empirical evidence.
Monopsony with Recruiting
(Slides)
with Justin Bloesch
and Birthe Larsen
Abstract: We develop a model of wage posting and on-the-job search where firms use wages and recruiting expenditures to attract workers. We capture three sources of labor market monopsony power: preference heterogeneity, search frictions, and labor market concentration. The model allows firms’ labor supply curves to be perfectly elastic in the long run but inelastic in the short run, consistent with evidence that firms pay higher wages while growing even though the wage premium at large firms is small. We provide empirical evidence that labor supply curves are perfectly elastic in the long run using the effect of export demand shocks on the wage growth of job switchers in Denmark. Our results imply that monopsony rents are dissipated by recruiting costs, which can reconcile existing estimates of monopsony power with the profit share of national income in rich countries.
The Incidence and Efficiency of Land Value Taxation
with Ulf Nielsson
and Caleb Wroblewski
Abstract: Land value taxes are often seen as particularly desirable because the fixed supply of land implies no efficiency loss from taxation, with the entire tax burden falling on current landowners. We study the incidence and efficiency of land taxes using a unique quasi-experiment that generated persistent variation in land tax rates across Danish municipalities. In contrast to the predictions of standard, neoclassical models, we estimate a precise zero effect of land taxes on residential home prices. The precision of our estimates allows us to confidently rule out full capitalization of taxes into home prices using leading estimates of housing discount rates. Our results imply that the burden of land taxes is shared with tenants and future purchasers. We also estimate null effects of land taxes on measures of housing development, mobility, and homeownership, though we do find that older homeowners sort away from high tax areas. Our results are consistent with limited efficiency costs of land value taxation but imply that land taxes are more regressive than predicted by standard models.
Work in Progress
Negative Interest Rate Policies: The Role of Pass-Through to Deposit Rates
(Slides)
with Tobias Renkin
Abstract: How effective are interest rate cuts into negative territory in stimulating the economy? The prevailing view is that they are less effective than in positive territory because banks are unable to pass negative rates through to retail depositors. We document a set of facts from the 2015–2022 negative interest rate period that challenge this view. First, negative deposit rates became widespread in several European countries toward the end of this period. Second, banks held retail deposit rates at zero for several years before abruptly introducing negative rates, even though policy rates were unchanged at the time. Third, using interest rate futures, we show that the introduction of negative deposit rates coincided with a substantial increase in the expected persistence of negative policy rates, indicating that banks began to view negative policy rates as a lasting rather than temporary regime. Fourth, we estimate the causal effect of introducing negative deposit rates on bank deposits by exploiting the staggered implementation across Danish banks. The estimated deposit outflows are economically meaningful but an order of magnitude smaller than predicted by standard models where cash is a close substitute for deposits. To explain these facts, we develop a model of banks with sticky depositors. Overall, our evidence suggests that negative interest rate policies are more effective when they are credible and persistent enough that banks pass them through to depositors.
Firm Investment and Foreign Demand Shocks
with Tobias Renkin