Bubbles and Stagnation 

Journal of the European Economic Association, April 2023

This paper studies the consequences of asset bubbles for economies that are vulnerable to persistent stagnation. Stagnation is the result of a shortage of assets that creates an oversupply of savings and puts downward pressure on the level of interest rates. Once the zero lower bound on the nominal interest rate binds, the real rate cannot adjust further downward, forcing output to fall instead. In such context, bubbles are useful as they expand the supply of assets, absorb excess savings and raise the natural interest rate—the real rate that is compatible with full employment—, crowding in consumption and raising welfare. However, a risky bubble that can collapse with positive probability is smaller and less effective in doing so than a safe bubble. In this case, fiscal policy in the form of promised bailout transfers in case of a bubble collapse, can support an existing bubble and improve its size. 

Working Papers 

Wealth Inequality in the US: The Role of Heterogeneous Returns (2023) 

In this paper, I investigate the importance of return heterogeneity as a source of wealth inequality. Using household-level data from the Survey of Consumer Finances (1989– 2019), I document that returns to wealth are heterogeneous across US households— ranging from 3.6% to 8.6%—, and that wealthier households earn, on average, higher returns. To understand how these return differences shape the distribution of wealth, I introduce return heterogeneity in a partial equilibrium model of household saving behavior. This exercise suggests that accounting for the documented return heterogeneity, in addition to earnings inequality, can fully account for the top 10% wealth share observed in the data, while earnings differences explain only half of that share. 

The Drivers of r*: Accounting for Treasuries' Convenience Yield (2024), with Balint Szoke and Francisco Vazquez-Grande

Since the Great Financial Crisis (GFC), the decline in the estimated natural rate of interest (r*) has outpaced the fall in expected potential output growth, leaving most of the decline unexplained. A growing literature highlights the importance of the premium commanded by liquid assets--often referred to as convenience yield--for the determination of the natural rate of interest and the transmission of monetary policy. This paper estimates r* using a stylized New-Keynesian model that explicitly accounts for the convenience yield on US Treasury securities. We present evidence that two slow-moving variables, the permanent component of potential output growth and the permanent component of the convenience yield on US Treasuries, almost fully account for the level of r*. We show that a rise in the convenience yield has contributed to the decline in r* since the GFC, and that accounting for the dynamics of the convenience yield increases the precision of the r* estimates.

Work in Progress

Asset Bubbles and Inequality, with Gadi Barlevy

A Model of Charles Ponzi, with Gadi Barlevy