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research

Working papers

Capital Taxation and Wealth Bubbles (replaces “Capital Gains Taxation, Learning and Bubbles”)

  [New Draft here!] 

Abstract. Despite greater macroeconomic stability, wealth has become more volatile in recent decades due to recurrent asset price booms and busts. I connect this fact to the decline in personal capital taxes. Theoretically, I show that in consumption-based asset pricing models, low taxes on dividends and capital gains increase the volatility of asset valuations by making them more sensitive to fluctuations in investors’ expectations. Furthermore, if investors extrapolate from prices, a lower tax enables self-fulfilling belief spirals that amplify price instability. Empirically, using the Simulated Method of Moments and US stock market data since 1946, I estimate the model with price extrapolation and show that it matches remarkably well a comprehensive list of asset pricing facts. The model suggests that capital tax cuts have not only elevated mean valuations by around 30% but also increased their volatility and reduced their informational efficiency by a similar magnitude. Capital gains tax cuts are particularly relevant for volatility, with effects twice as large as equivalent dividend tax cuts. These findings underscore the crucial role of capital taxes, especially on capital gains, in curbing excessive asset price volatility. 

Work in progress

The Fiscal Channel of Quantitative Easing (with Luis E. Rojas and Sarah Zoi)

  [Draft coming soon]

Abstract. This paper characterizes a fiscal channel of Quantitative Easing (QE). We analyze a Stackelberg game whereby the Central Bank determines both the interest rate and asset purchases and, subsequently, a Government without commitment decides on distortionary taxation and useful spending. The existence of tax distortions undermines Wallace’s neutrality, triggering macroeconomic effects. On one side, QE boosts output, particularly when interest rates are low and aggregate risk is elevated. However, through the fiscal channel, QE heightens the covariance between private consumption and aggregate risk, increasing the risk premium. This is in contrast to the conventional view that QE stimulates demand by reducing risk premiums through the relaxation of financial frictions. A Central Bank needs to balance the efficiency gains from more QE against the heightened risks it introduces.

Material Footprint and Economic Cycles (with Marina Requena

[Draft coming soon]

Abstract. Breaking with the previous trend, a set of rich countries grew their income while decreasing their material footprint since the Global Financial Crisis. While this fact seems consistent with the downward side of an Environmental Kuznets Curve (EKC), most of it actually is the unexplained residual of the EKC regression. The paper does an anatomy of the EKC residuals. We provide evidence that, in most countries, the lion share of the residual variation is related to a boom-bust economic cycle around the housing bubble. Transformations in the mining and energy sector play a secondary role. Drawing on these empirical observations, we reinterpret the EKC residuals as Environmental Kuznets Swings —cyclical patterns of rematerialization and dematerialization that reflect the cyclical nature of fixed investment.

Heterogeneous Expectations and Wealth Inequality (with Adrian Ifrim and Janko Heineken

[Draft coming soon]

Solving asset pricing models with learning through the Parameterized Expectations Algorithm