Working Papers
“Debt Maturity Management Under Fiscal-Monetary Bargaining” November 2024. (JMP)
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As part of its institutional toolkit, the United States Federal Reserve conducts open market operations by exchanging shot-term Fed-issued liabilities for non-Fed-issued assets. Importantly, it is legally disallowed from issuing any new liability with a maturity greater than 90 days.
A debt-manager concerned with being `regular and predicable' and `targeting debt costs' may issue a structure of government debt different from that which maximizes welfare. A welfare-maximizing central bank with unconstrained issuance always perfectly corrects this structure, though one unable to issue long-term debt may not. I investigate theoretical consequences of market incompleteness resulting from this institutional constraint and find substantial welfare costs using a neural network solution method.
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This paper develops a theoretical framework in which fiscal and monetary authorities interact strategically to determine the optimal choices of taxes, inflation, and the maturity structure of nominal debt to finance government spending. Fiscal and monetary policymakers are separate entities with potentially distinct objectives. Greater fiscal bargaining power leads to higher inflation and lower tax rates in the baseline case. This bargaining approach rationalizes large differences in U.S. inflation experiences, such as those observed post-GFC and post-COVID. I impute historical U.S. fiscal-monetary bargaining power, documenting substantial spikes in fiscal power in 1950, throughout the 1970s, and after COVID. Of the three, the recent post-COVID spike best approximated first-best outcomes because surprise inflation is more effective at financing highly-indebted governments.
Publications
“Regressive Effects of Regulation on Wages” (with James Bailey and Diana Thomas), Public Choice, July 2019.
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A growing body of literature analyzing the distributive consequences of regulation suggests that regulation may have particularly detrimental effects on lower-income households. Regulation can be regressive if it represents the preferences of the wealthy while imposing costs on all households. The specific channel through which regulation may impose costs on lower-income households is its effects on prices and wages. In this issue, Chambers et al. investigate the impact of regulation on prices. They find that regulation raises consumer prices; regulatory interventions therefore are regressive because lower income consumers tend to spend larger percentages of their budgets on regulated goods and services. In this paper, we seek to analyze the effect of regulation on wages across different income levels and occupations.
Press
“A Fiscal Accounting of COVID Inflation” (with Eric Leeper), Mercatus Center Special Study, December 2023.
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Federal COVID-related spending was largely financed through government borrowing with minimal discussion of repayment strategies. Inflation surged in 2021 and remains higher than target. The fiscal theory of the price level helps us examine the intricate interplay of fiscal and monetary policies in shaping this inflation episode.
We focus on two accounting methodologies. Backward accounting dissects changes in the government debt–GDP ratio throughout the COVID period, attributing it to changes in primary deficits, interest rates, inflation, and economic growth. Forward accounting links the market value of debt to expected discounted primary surpluses to interpret current inflation and bond prices in terms of changing beliefs about future fiscal and monetary policy actions.
COVID-related spending, predominantly in the form of transfers to individuals and businesses, in combination with the lack of anticipated tax increases, led to increased consumer expenditure, a swift economic recovery, and ensuing inflation. This work underscores how fiscal policy, monetary policy and household expectations shaped inflation dynamics during and after the COVID crisis.
“Appendix B: Modern Monetary Theory: The End of Policy Norms As We Know Them?” (with Eric Leeper), February 2022.