Housing and Tax-Deferred Retirement Accounts

May 30, 2016

By Anson T. Y. Ho and Jie Zhou


Assets in tax-deferred retirement accounts (TDA) and housing are two major components of household portfolios. In this paper, we develop a life-cycle model to examine the interaction between households’ use of TDA and their housing decisions. The model generates life-cycle patterns of home ownership and the composition of net worth that are broadly consistent with the data from the Survey of Consumer Finances. We find that TDA promotes home ownership, as households take advantage of the preferential tax treatments for both TDA and home ownership. They substitute TDA assets for home equity by accumulating wealth in TDA and making smaller down payments (taking out bigger mortgages); consequently, they become homeowners earlier in their lives. On the other hand, housing-related policies, such as a minimum down payment requirement and mortgage interest deductibility, affect households’ housing decisions more than their use of TDA.

It is no mystery that savings decisions are complex. The authors here address jointly two important savings motives, and they show that they should not be studied separately. This means that looking the impact of policy changes has now become more complex. For example, a simplification of the various TDAs offered in the US will likely have an impact on homeownership. Unfortunately, this means that such studies will need heavy artillery in terms of computing power.

An empirical equilibrium model of a decentralized asset market

May 18, 2016

By Alessandro Gavazza


I estimate a search-and-bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations, asset prices and welfare, and to quantify the effects of intermediaries that facilitate trade. Using business-aircraft data, I find that, relative to the Walrasian benchmark, 18.3 percent of the assets are misallocated; prices are 19.2-percent lower; and the aggregate welfare losses equal 23.9 percent. Dealers play an important role in reducing trading frictions: In a market with no dealers, a larger fraction of assets would be misallocated, and prices would be higher. However, dealers reduce aggregate welfare because their operations are costly, and they impose a negative externality by decreasing the number of agents’ direct transactions.

That is a pretty cool paper, especially in the current debate about what added value financial brokers and wealth managers actually bring to the table. For this reason, I would have preferred a title like “Do Asset Dealers Contribute to Aggregate Welfare?” Readership would then be an order of magnitude larger.

Optimal Trade Policy, Equilibrium Unemployment and Labor Market Inefficiency

May 13, 2016

By Wisarut Suwanprasert


Why do politicians advocate trade protections to save domestic jobs when neoclassical trade models suggest that small open economies should implement free trade? The novel insight of this paper is that trade protections can be rationalized as a second-best policy that improves the domestic welfare when the equilibrium unemployment is different from the constrain-efficient unemployment. To understand the puzzle, I incorporate a Diamond-Mortensen-Pissarides frictional labor market into the standard Heckscher-Ohlin model of international trade. The model offers four main findings. First, when the relative price of the labor (capital)-intensive good increases, equilibrium unemployment decreases (increases). Second, a labor market in a competitive equilibrium is constrained-efficient when the Hosios condition is satisfied. Third, a capital-abundant country with inefficiently high unemployment may experience welfare losses from trade. Conditional on having the same observed trade share, a labor-abundant country with inefficiently high unemployment have extra welfare gains from international trade. Finally and importantly, when the labor market in a small open economy generates inefficiently high equilibrium unemployment, the optimal trade policy is to raise the domestic price of its labor-intensive goods (an import tariff in a capital-abundant country and an export subsidy in a labor-abundant country). Free trade is optimal only when a labor market is initially efficient. The model predictions are supported by patterns of tariffs in WTO member countries.

VERY timely paper on a topic that economists are thought to have wide agreement on, perhaps wrongly. I am looking forward to the literature this paper will spawn.

April 2016 calls for papers

May 1, 2016

A few days late due to travel. Email me to include more, and early enough so that the deadline is not passed by the time I get to post them.

Tools to work with modern macro models Summer course, London, 15-26 August 2016.

Ensuring Economic and Employment Stability Network, New York, 8-9 September 2016.

Liquidity and Financial Crises, Philadelphia, 13-14 October 2016.

Carnegie-Rochester-NYU Conference on Public Policy on “Accounting for Slow Growth”, New York, 21-22 April 2017.