Working Papers

Inequality, Taxation, and Sovereign Default Risk [paper] [slides]

Job Market Paper

Abstract: This paper studies the impact of income inequality on sovereign spreads under elastic labor and endogenous taxation. I first document that high pre-tax income inequality is associated with high spreads both across countries and across U.S. states. I then develop a sovereign default model with endogenous progressive taxation and heterogeneous labor in productivity and migration cost. The government chooses the optimal combination of tax and debt, considering their interaction. Progressive taxes redistribute income but discourage labor supply and induce emigration, eroding the tax base and the government's ability to repay debt. Default risk increases sovereign spreads and borrowing costs. Thus, the government faces a trade-off between redistribution and spreads. In more unequal economies, the government opts for more redistribution and higher spreads. With the model parameterized to state-level data, I find that income inequality is an important determinant of spreads, generating 20 percent higher spreads compared with a model without income inequality. In a recession, more unequal economies suffer a larger increase in spreads.

Migration and Sovereign Default Risk [paper] [slides]

(joint with George Alessandria and Yan Bai)

Accepted by Journal of Monetary Economics (Carnegie-Rochester-NYU Series on Public Policy)

Abstract: We study the role of migration in a sovereign debt crisis. Empirically, we document a large worker outflow accompanies a rise in sovereign debt spreads. We develop a model of sovereign default with an endogenous migration choice to understand how migration interacts with the default risk and propagates a debt crisis. In the model, the outflow of workers erodes the tax base and increases the government's debt burden by increasing debt per-capita, further increasing default risk. As a result, the government decreases investment, which affects the consumption of the workers. Lower consumption, in turn, increases the probability of emigration. Compared with a model without endogenous migration, our model generates a higher default risk, lower investment, and a deeper and more prolonged recession. The impact of the migration channel is even more substantial when the average migrant has higher levels of human capital relative to locals. Despite the deeper recessions experienced with migration, agents are better off with the option to migrate.

Work in Progress

  • International Spillovers of U.S. Monetary Policy: Evidence from Chinese Firm-level Data (joint with Yumei Guo and Yanbin Chen) [slides]
  • Capital Flows, Migration, and Business Cycles [slides]
  • Financial Heterogeneity and Aggregate Shocks Transmission (joint with Min Fang) [slides]