Research

Do capital gains tax cuts destabilize or stabilize asset prices? In an asset pricing model with heterogeneous agents and realization-based taxation, a tax cut has two opposing effects. It dampens volatility by reducing realization-based trading frictions, but also amplifies it by strengthening the pass-through from expectations to prices, fueling self-fulfilling fluctuations. Estimated on U.S. stock-market data, the model implies that the sequence of tax cuts since the 1970s triggered a net increase in volatility of about +35%, driven primarily by stronger belief-to-price pass-through. Policy experiments suggest a tax on unrealized gains robustly reduces volatility, whereas a financial transaction tax has mixed effects.

Households persistently disagree about how the stock market will perform. This paper studies the origins of this disagreement and its consequences for the distribution of wealth. We develop a model in which belief heterogeneity emerges endogenously as households learn from their own investment experiences. We embed this mechanism in a general-equilibrium heterogeneous-agent model with aggregate risk, where beliefs affect asset prices and hence the experiences from which households subsequently learn. Analytically, we show that disagreement can increase inequality even as it lowers average long-run wealth growth, by producing rare, exceptionally wealthy winners. Quantitatively, the model jointly accounts for key microdata facts about the persistence, wealth gradient, and experience dependence of beliefs, as well as salient features of asset prices and the U.S. wealth distribution. The model implies that belief heterogeneity raises the top 10 percent wealth share by about 10 percentage points. Methodologically, we show that departing from full-information rational expectations not only helps reconcile the model with survey evidence, but also makes general-equilibrium heterogeneous-agent models substantially more tractable.

We document that survey expectations largely miss the excess-return predictability observed in bond markets, in violation of rational expectations. We rationalize this fact with a model in which investors have imperfect knowledge of the equilibrium pricing function and learn about it. Learning imparts inertia to bond prices and quantitatively accounts for both the survey evidence and key features of bond markets. Methodologically, we extend the Internal Rationality framework—in which agents optimize given their subjective beliefs—to multiple assets, requiring beliefs to specify a coherent joint perceived distribution of bond prices.

I study how central bank preferences shape monetary policy when aggregate risk is priced. In response to an inflationary supply shock, policy determines how risk is split between output and inflation, and hence the risk priced by financial markets. The resulting risk premia alter both policy implementation and macroeconomic outcomes. A more inflation-oriented central bank can contract activity more while raising the policy rate less, because greater output risk already dampens demand due to higher premia. Interest-rate smoothing can backfire: delayed adjustment can raise risk premia enough to deepen rather than cushion the output contraction. Finally, when uncertainty is sufficiently high, society optimally appoints a central banker who places more weight on output stabilization than society itself to limit the recession risk generated by aggressive inflation stabilization, reversing Rogoff’s conservative-central-banker result.

We recast the Ramsey problem—in which a benevolent government finances public spending through distortionary taxation while managing its balance sheet—as a recursive portfolio problem. We characterize the public wealth and balance-sheet positions that sustain the first-best allocation, and derive tractable expressions under different market structures.

We uncover a fiscal channel of Quantitative Easing arising from the interaction between central-bank asset purchases and distortionary fiscal policy. QE can stimulate output, especially when rates are low and aggregate risk is high, but it also changes the distribution of risk and can raise risk premia. Optimal QE therefore trades off these efficiency gains against the additional risk it creates.

What drives long-run productivity growth? We develop a thermodynamically grounded theory in which useful exergy—the capacity of energy to perform productive work—provides a physical foundation for TFP. We bring this framework to the data to ask how much of the “measure of our ignorance” can be understood through improvements in exergy efficiency, and what this implies for past and future waves of economic growth.