research
Working papers
Capital Taxation and Asset Price Volatility (replaces “Capital Gains Taxation, Learning and Bubbles”)
[New Draft here] Reject and Resubmit at the American Economic Review
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)
[New 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.
Heterogeneous Expectations and Wealth Inequality (with Adrian Ifrim and Janko Heineken)
[New draft here]
Abstract. Using microdata, we document substantial heterogeneity in households’ stock return expectations that persists over time and correlates strongly with wealth. We develop a rich heterogeneous agent model where this belief dispersion arises endogenously through learning from experience, creating a feedback loop between expectations and portfolio choices. The model matches key features of the joint distribution of expectations, portfolio returns, and wealth in the data. Belief heterogeneity amplifies wealth concentration through two channels: optimistic households both save more and choose riskier portfolios, generating higher realized returns that further reinforce their optimistic beliefs. Relative to a homogeneous-beliefs benchmark, heterogeneous expectations increase the wealth share of the top 1% by 50%. Methodologically, we show that Internal Rationality -where households learn about prices directly rather than needing to forecast entire distributions – makes heterogeneous agent models with aggregate risk both more realistic and more tractable.
Abstract. We show that a key element to understanding the behavior of bond yields is that investors have to learn how bond prices are formed. We consider a number of features of US bond yields already mentioned in the literature, including the mean and volatility of excess long bond returns, flat term structure of yield volatilities, correlations of yields across maturities and time and the failure of the Expectations Hypothesis. We report a new observation: survey expectations about yields understate the effect of the current slope on future excess returns, thus rejecting RE. We show that all these observations become a natural outcome of an otherwise very simple model where investors are Internally Rational (IR) as in Adam and Marcet (2011). Investors have reasonable beliefs about the yield curve, they optimize given this knowledge about bond prices but they do not know the pricing function. Learning about the effect of the slope on future bond prices imparts an inertia on actual bond prices and this generates all the above observations in a natural way. The paper develops the IR methodology: investors’ problem contains many assets and, therefore, an IR formulation involves specifying the joint perceived distribution of all asset prices. We discuss how investors’ rationality in the model is compatible with standard solutions for yield curves based on iterations using the stochastic discount factor.
Material Footprint and GDP: Is Green Growth Happening? (with Marina Requena-i-Mora)
[Pre-print here!] Under review at The Lancet – Planetary Health
Background. Economic growth has historically driven up raw material use, causing environmental damage. Past research indicated that dematerialization —reducing the Material Footprint while increasing GDP — was not occurring and was deemed unlikely. We reexamine this issue using comprehensive material flow data spanning from 1970 to 2019.
Methods. Using non-parametric techniques, we decompose the Material Footprint-GDP relationship into two components: a long-run trend and deviations from the trend —the Residuals. Our key innovation is to analyze these often disregarded Residuals. We decompose them into distinct material types and economic sectors, and examine their drivers, offering new insights into the mechanisms shaping the recent dynamics.
Findings. Among the 93 countries analyzed, 24 exhibited dematerialization, mostly since 2007. During this period, changes in the long-run trend explain only 5% of the Material Footprint-GDP variation, with 95% of it attributable to the Residuals. About 60% of the Residuals variation is due to non-metallic minerals, primarily associated with construction-related sectors. Instead of reflecting efficiency gains, Residuals are strongly predicted by variables related to the housing cycle. The recent dematerialization reflects primarily the housing market crash, reversing the material intensification that occurred during the preceding housing boom.
Interpretation. The observed dematerialization is largely a transitory phenomenon associated to the housing cycle, rather than a long-lasting transition to sustainable growth.