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Institute
Essays on Macroeconomics
(2021)
This dissertation consists of four self-contained papers. Each paper deals with a specific macroeconomic question. The first paper assesses the distributional implications of environmental policies from a general equilibrium macroeconomic perspective. I develop a New-Keynesian model with several types of uncertainties and frictions that incorporates liquidity constrained households. The model is calibrated to match the German economy and the numerical results show that climate policy instruments can be associated with regressive welfare effects. Furthermore, the analysis shows that these effects can be mitigated through an appropriate revenue recycling scheme. The second paper deals with short-run inequality dynamics within a real business cycle model. An empirical evaluation shows that the cyclical components of income inequality, the capital share and real GDP are correlated. We develop tractable representation of common inequality indicators in the general equilibrium model and show that the observed pattern is driven by innovations in the capital share. A Bayesian estimation of the model for the United States with data for the period 1948 to 2017 indicates that the model provides a reasonable fit for the data and successfully replicates the observed pattern of cyclical correlations. The third paper empirically examines the effects of banking regulation on the risk-relationship between sovereigns and banks. Based on a comprehensive data set of the European banking sector, we find that the implementation of the novel European banking regulation framework significantly contributed to a weakening of the risk-link between sovereigns and banks.The fourth paper empirically examines the role of institutional experience for institutional development in transition economies. To capture institutional experience, we develop a novel index, based on historical country records. The results of cross-sectional and panel estimations suggest that institutional experience helps to explain the divergent economic and institutional development in transition economies after the dissolution of the Soviet Union.
To understand the divergent institutional development in transition economies, we examine the role of institutional experience from the pre-Soviet era in institution-building after the dissolution of the Soviet Union. To measure institutional experience, we construct an index that captures previous experience with independent non-Soviet institutions. A cross-sectional analysis shows that institutional experience is statistically significantly associated with the quality of political, administrative, and legal institutions in transition economies today. To provide a more comprehensive picture and to control for confounding factors, in a second step, we apply a Hausman-Taylor estimator on panel data. This analysis confirms the positive relationship between institutional experience and institutional development. Moreover, the results suggest that the association between institutional experience and political institutions is stronger than the association to the other dimensions of institutions. Overall, the analysis highlights the importance of institutional experience and provides a rationale for the persistency of institutions.
This paper examines how wealth and income inequality dynamics are related to fluctuations in the functional income distribution over the business cycle. In a panel estimation for OECD countries between 1970 and 2016, although inequality is, on average countercyclical and significantly associated with the capital share, one-third of the countries display a pro- or noncyclical relationship. To analyze the observed pattern, we incorporate distributive shocks into an RBC model, where agents are ex ante heterogeneous with respect to wealth and ability. We find that whether wealth and income inequality behave countercyclically or not depends on the elasticity of intertemporal substitution and the persistence of shocks. We match the model to quarterly US data using Bayesian techniques. The parameter estimates point toward a non-monotonic relationship between productivity and inequality fluctuations. On impact, inequality increases in response to TFP shocks but subsequently declines. Furthermore, TFP shocks explain 17% of inequality fluctuations.
What is it good for?
(2023)
Military conflicts and wars affect a country’s development in various dimensions. Rising inflation rates are a potentially important economic effect associated with conflict. High inflation can undermine investment, weigh on private consumption, and threaten macroeconomic stability. Furthermore, these effects are not necessarily restricted to the locality of the conflict, but can also spill over to other countries. Therefore, to understand how conflict affects the economy and to make a more comprehensive assessment of the costs of armed conflict, it is important to take inflationary effects into account. To disentangle the conflict-inflation-nexus and to quantify this relationship, we conduct a panel analysis for 175 countries over the period 1950–2019. To capture indirect inflationary effects, we construct a distance based spillover index. In general, the results of our analysis confirm a statistically significant positive direct association between conflicts and inflation rates. This finding is robust across various model specifications. Moreover, our results indicate that conflict induced inflation is not solely driven by increasing money supply. Furthermore, we document a statistically significant positive indirect association between conflicts and inflation rates in uninvolved countries.
Legal institutions, financial liberalization and financial development in transition economies
(2021)
Income inequality and taxes
(2023)
Economic literature offers several distinct explanations for the raising income inequality observed in several countries. In the debate about the causes of inequality a growing strand of research focuses on the effects of taxation on income inequality. We contribute to this literature by providing a systematic empirical account of the relationship between income inequality and personal income taxation (PIT) for a set of countries over the period 1981–2005. In order to take alternative explanations into account and to isolate the effects of tax progressivity, we include a wide range of control variables. We address potential reverse causality between inequality and PIT by using the variation in tax schedules of neighbouring countries. Our results confirm a statistically significant negative association between the progressivity of PIT and income inequality. Overall, we find that especially the average and the marginal tax rate have the potential to reduce income inequality. This finding is qualitatively robust across various different empirical specifications.
Promoting the decarbonization of economic activity through climate policies raises many questions. From a macroeconomic perspective, it is important to understand how these policies perform under uncertainty, how they affect short-run dynamics and to what extent they have distributional effects. In addition, uncertainties directly associated with climate policies, such as uncertainty about the carbon budget or emission intensities, become relevant aspects. We study the implications of emission reduction schemes within a Two-Agent New-Keynesian (TANK) model. This quantitative exercise, based on data for the German economy, provides various insights. In the light of frictions and fluctuations, compared to other instruments, a carbon price (i.e. tax) is associated with lower volatility in output and consumption. In terms of aggregate welfare, price instruments are found to be preferable. Conditional on the distribution of revenues from climate policies, quantity instruments can exert regressive effects, posing a larger economic loss on wealth-poor households, whereas price instruments are moderately progressive. Finally, we find that unexpected changes in climate policies can induce substantial aggregate adjustments. With uncertainty about the carbon budget, the costs of adjustment are larger under quantity instruments.
In light of climate change mitigation efforts, revenues from climate policies are growing, with no consensus yet on how they should be used. Potential efficiency gains from reducing distortionary taxes and the distributional implications of different revenue recycling schemes are currently debated. To account for households heterogeneity and dynamic trade-offs, we study the macroeconomic and welfare performance of different revenue recycling schemes using an Environmental Two-Agent New-Keynesian model, calibrated on the German economy. We find that, in the long run, welfare gains are higher when revenues are used to reduce distortionary taxes on capital, but this comes at the cost of higher inequality: while all households prefer labor income tax reductions to lump-sum transfers, only financially unconstrained households are better off when reducing taxes on capital income. Interestingly, we find that over the transition period relevant to meet short-medium run climate targets, labor income tax cuts are the most efficient and equitable instrument.
The effects of energy price increases are heterogeneous between households and firms. Financially constrained poorer households, who spend a larger relative share of their income on energy, are particularly affected. In this analysis, we examine the macroeconomic and welfare effects of energy price shocks in the presence of credit-constrained households that have subsistence-level energy demand. Within a Dynamic Stochastic General Equilibrium (DSGE) model calibrated for the German economy, we compare the performance of different policy measures (transfers and energy subsidies) and different financing schemes (income tax vs. debt). Our results show that credit-constrained households prefer debt over tax financing regardless of the compensation measure due to their difficulty to smooth consumption. On the contrary, rich households tend to prefer tax-financed measures as they increase the labor supply of poor households. From an aggregate perspective, tax-financed measures targeting firms effectively cushion aggregate output losses.