Unemployment and Inflation: A Bayesian HANK Approach
Publications
Active vs. passive policy and the trade-off between output and inflation in HANK.
Journal of Monetary Economics,
April 2025,
Vol. 151.
Article 103732.
When fiscal policy is active and monetary policy is passive in a heterogeneous agent New Keynesian (HANK) model, deficit-financed transfers to low-asset households lead to similar cumulative inflation but greater increases in real output than transfers to wealthier households. I use the inverse of the “Phillips multiplier”, the price level sacrifice ratio, to quantify this dynamic. Household heterogeneity and targeted policy change the timing of output gaps, making this consistent with the Phillips Curve and rendering conventional sacrifice ratio intuition misleading for assessing the inflation/output trade-off between policies.
I hypothesize that cash transfers to poor households improve the mental health of recipient
children. Specifically, I posit that the 1993 Omnibus Budget Reconciliation Act’s expansion
of the Earned Income Tax Credit (EITC) could have worked through a number of mechanisms
to reduce the incidence of depression, anxiety, and antisocial behavior among children in
eligible households, as reported by broad survey indexes. To test this claim, I estimate the
intent-to-treat (ITT) effect of the EITC using a difference-in-differences (DID) identification
strategy, with linear controls and household and region fixed effects. I find evidence that
the federal tax credit expansion reduced externalizing behavior and tendencies among low-
income children.