Jonathan Kreamer

Since sectors differ in their sensitivity to interest rates, monetary policy produces inefficient sectoral fluctuations.  In a model with sectoral heterogeneity, I show that policymakers should weight sectors proportionally to their interest elasticities, account for dynamic demand effects from durable goods, and systematically utilize forward guidance to reduce sectoral volatility. A calibrated model confirms these recommendations, and finds that neglecting sectoral volatility produces substantial welfare losses. The best-performing policy rule stabilizes a sectorally-weighted measure of inflation, plus lags of past durable inflation. 

I study the role of financial intermediaries in supplying liquidity to the real economy.  Firms hold liquid assets to meet unanticipated expenses. Financial intermediaries supply liquidity by pooling partially liquid assets, but their ability to commit future funds depends on their capital. When liquidity is scarce, there is a positive liquidity premium and investment is inefficiently low. Bank losses raise the liquidity premium and reduce investment. I analyze the optimal supply of public liquidity and find that when private liquidity is scarce the government should issue bonds for their liquidity properties, providing justification for countercyclical budget deficits.

Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation at center stage. We develop a model in which the financial sector benefits from financial risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit.

When sectors differ in their sensitivity to interest rates, exclusive reliance on monetary policy produces inefficient sectoral volatility, and there is a role for active fiscal policy to complement monetary policy. I analyze optimal joint fiscal and monetary policy in a multisector model. I derive simple conditions for optimal policy without commitment in terms of sectoral labor wedges and fiscal demand elasticities. The optimal fiscal policy is countercyclical when public goods are complements of private goods, and procyclical when public goods are substitutes in demand or inputs into production. I then examine fiscal and monetary policy rules in a calibrated two-sector model subject to Calvo pricing frictions.  I find that there are substantial welfare gains from active fiscal policy, and that it is optimal for public spending to respond strongly to sectoral inflation. These results hold even when fiscal policy is subject to significant implementation delays.

I study the dynamics of an economy with endogenous unemployment risk in a liquidity trap. Expectations of high unemployment increase precautionary saving and worsen credit conditions, reducing demand. When the interest rate cannot fall in response, pessimistic expectations are self-fulfilling and multiple equilibria exist. For a particular equilibrium, this channel amplifies demand shocks and slows the pace of deleveraging from a high debt state. An endogenous borrowing constraint increases amplification, but speeds up deleveraging.

Recent breakthroughs in AI and robotics have raised concerns about the distributional consequences of automation. Motivated by these concerns, we ask how workers would prefer to manage an episode of automation, given access to a broad-based basic income transfer, along with capital and labor taxes. We address this question using a task-based model of production wherein we capture distributional concerns by including two kinds of agents --- workers, who supply labor, and entrepreneurs, who own capital. Automation represents a shift in the relative productivity of capital at certain tasks that reduces the set of tasks done by labor whereas "traditional technical progress" raises the productivity of capital  in tasks it does currently. We show that under majority voting with the option to implement a "partial" UBI (as transfers to workers) it is optimal to tax capital at a higher rate than labor in the long run, independent of technology, to fund the partial UBI. We show that, unlike traditional technical progress, automation always lowers the labor share in the long run, justifying distributional concerns. In a quantitative analysis of an episode of automation in the model calibrated to the U.S. economy, we find that it is optimal from the workers' perspective to lower capital taxes and transfers over the transition, although they benefit an order of magnitude less from this policy than do entrepreneurs. This is because the welfare gains to workers from this policy are second-order, while the gains to entrepreneurs are first-order.

Given the division of labor and time lags between production and sale of goods, economic agents typically do not fund their consumption out of income from current production.  They instead draw on liquid assets and short-term credit to finance current consumption.  During recessions, returns on liquid assets fall and credit conditions worsen, tightening access to liquidity.  To study these dynamics, I construct a model in which liquid assets and short-term credit are necessary for consumption.  If available assets and credit are sufficient, the model is identical to a standard growth model.  However, when there is insufficient credit, consumer demand falls and output is inefficiently low.  Credit constraints are endogenous and depend on the return to production.  A demand shock can trigger an amplification process, where lower demand reduces the return to production, tightening available credit and reducing demand further. In a crisis state, there is equilibrium underconsumption and overproduction.  In normal times, there is equilibrium oversmoothing: oversaving by wealthy households and overborrowing by poor households. There is a clear role for policy, as government spending stimulates demand and relaxes consumer borrowing constraints.