Inequality and Macroeconomic Policy : Essays on Climate, Immigration and Fiscal Intervention

Abstract: This thesis consists of four self-contained essays in economics.Optimal Climate Policy with Household Wealth Inequality. Policy makers concerned with setting optimal carbon taxes to address climate change externalities often employ integrated assessment models (IAMs). While these models differ on their assumptions of climate damage impacts, discounting and technology, they conform on their assumption of complete markets and a representative household. In the face of global inequality and significant vulnerability of asset poor households, I relax the complete markets assumption and introduce a realistic degree of global household inequality. A simple experiment of introducing a range of global carbon taxes shows a household's position on the global wealth distribution predicts the identity of their most preferred carbon price.Immigration Shocks, Equilibrium Unemployment and Inequality. The purpose of this paper is to present a proof-of-concept model for assessing the impact of immigration shocks on a country's equilibrium unemployment, wages and inequality. The model implements labour market matching in the workhorse heterogeneous agent macro model with precautionary savings. In this setting, I perform several transition experiments exploring the channels and mechanisms through which a substantial immigration shock affects macroeconomic outcomes, including conditional welfare and economic integration. I find that the identity of the immigration cohort, as well as, features of the receiving economy matter for both the magnitude and direction of the response.Fiscal Multipliers in the 21st Century. Fiscal multipliers appear to vary greatly over time and space. Based on VARs for a large number of countries, we document a strong correlation between wealth inequality and the magnitude of fiscal multipliers. In an attempt to account for this finding, we develop a life-cycle, overlapping-generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of OECD economies, including the distribution of wages and wealth, social security, taxes, and government debt and study how a fiscal multiplier depends on various country characteristics. We find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also to the average wealth level in the economy. These findings together help us generate a cross-country pattern of multipliers that is quite similar to that in the data.Fiscal Consolidation Programs and Income Inequality. Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three different empirical approaches, we document a strong positive relationship between higher income inequality and stronger recessive impacts of fiscal consolidation. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, including the distribution of wages and wealth, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers in line with the data.

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