research
Working papers
Capital Taxation and Asset Price Volatility (replaces “Capital Gains Taxation, Learning and Bubbles”)
[Draft here] Reject and Resubmit at the American Economic Review. New draft coming soon!
Abstract. Recent decades have seen higher wealth volatility due to asset price fluctuations. This paper argues that declining capital taxes are a key factor. In a model where investors learn about prices, lower taxes amplify the pass-through from expectations to prices, fueling a price-expectations spiral that generates volatility. Survey evidence supports this increased pass-through when taxes were cut. The estimated model replicates many U.S. stock market moments and suggests tax cuts increased volatility by 35%, while reducing market efficiency. Capital gains tax cuts had twice the impact on volatility compared to dividend tax cuts, emerging as particularly relevant for financial instability.
Can a Sovereign Wealth Fund Improve Fiscal Sustainability?
(with Luis E. Rojas and Sarah Zoi)
[Draft here]
Abstract. We study the macroeconomic implications of a debt-financed sovereign wealth fund (SWF) that invests in the domestic stock market. In a stochastic general equilibrium model with distortinary taxation, we show that the SWF can improve fiscal sustainability despite initially increasing public debt. The SWF generates efficiency gains by reducing distortionary taxation, which stimulates economic growth, but at the cost of amplifying macroeconomic volatility. Paradoxically, this increased volatility benefits the government by deteriorating the hedging properties of stocks, which raises the equity premium that the SWF captures, while simultaneously triggering a flight-to-safety effect that lowers government borrowing costs. These combined effects—higher economic growth, increased stock returns, and reduced interest expenses—enhance fiscal sustainability. The optimal size of the SWF results from balancing efficiency gains against increased risk, with maximum size being optimal under constant marginal efficiency gains of lower taxes. Certain versions of Central Banks’ asset purchase programs can be interpreted as a de facto SWF.
Learning to Be Rich: How Expectations amplify Wealth Inequality (with Adrian Ifrim and Janko Heineken) (replaces “Heterogeneous Expectations and Wealth Inequality”)
[New Draft here!]
Abstract. We document systematic heterogeneity in stock-market beliefs across the wealth distribution: low-wealth households are persistently too pessimistic, while high-wealth households’ expectations are approximately unbiased. We develop a heterogeneous-agent model in which belief dispersion arises endogenously through learning from experience, generating a feedback loop: good past returns foster optimism, induce higher equity shares, and lead to higher future returns that further reinforce optimistic beliefs. The calibrated model matches key features of the joint distribution of expectations, portfolio returns, and wealth. Heterogeneous beliefs increase the top 1% wealth share by 50% relative to homogeneous expectations. Methodologically, we show that Internal Rationality—where households learn directly about the law of motion for prices rather than forecasting entire distributions—makes heterogeneous-agent models with aggregate risk both more realistic and tractable.
Abstract. Simultaneously accounting for key features of bond markets —high excess return volatility, flat yield volatility term structures, and Expectations Hy- pothesis violations— remain challenging for equilibrium models. Additionally, we document that survey expectations systematically overestimate how cur- rent yield slopes predict future excess returns, rejecting the standard assump- tion of full information rational expectations. We show that these observa- tions arise naturally from a parsimonious model where investors are Internally Rational—they optimize given their understanding of bond pricing but must learn the true pricing function. When learning about how slopes affect fu- ture prices, their beliefs become self-reinforcing: high expected slopes drive up long bond prices, validating initial beliefs and creating persistent price inertia. This single mechanism explains both the stylized facts and survey evidence. Methodologically, we extend Internal Rationality to multiple asset, which requires to specify the joint perceived distribution of all asset prices.