Researchstatement
AlisdairMcKay
April,2016
Mostofmacroeconomicshasmadetwoimportantsimplifications.First,theeconomyispopulated
byarepresentativehouseholdthatchoosesaggregateconsumption,savings,andlaborsupply.
Second,agentshavecompleteinformationabouttheeconomyinmakingtheirdecisions.Working
withinalternativeparadigmswhichhavebeguntobeexploredbymacroeconomists,myresearch
developsmodelswhichintroduceheterogeneityinhouseholdcircumstancesandbeliefs.While
theseconsiderationsarenotalwaysquantitativelyrelevantforaggregateandindividualoutcomes,
eachturnsouttobequiteimportantinthestudiesdescribedbelow.
Businesscycleswithheterogeneoushouseholds.Whiletherepresentativeagentassumptionis
atoddswithmicroeconomicevidence,thebusinesscyclepredictionsofrepresentativeagent
modelshavebeenfoundtocoincidecloselywiththosefromsomeearly,richermodelsthatallow
forhouseholdheterogeneity,leadingsometoconcludethatheterogeneityisasecondorderissuein
businesscycleanalysis.However,arecentlineofliteraturereconsidersthistopicwhenthelevelof
aggregatedemandplaysaroleindeterminingtheequilibriumproductionofgoods.Thisresearch
thusmergesmodelsofhouseholdheterogeneitywithnewKeynesianmodelsoftheeconomyin
whichnominalrigiditiesinterferewiththeimmediateandperfectadjustmentofpricesandinterest
ratestochangesinaggregatedemand.Severalofmyresearchprojectscontributetothisliterature.
MyworkwithRicardoReisonautomaticstabilizersexploreshowsocialinsurancepoliciesalterthe
businesscyclebychangingthedistributionofincome.1Thetraditionallogicofautomaticstabilizers
isthattheymitigatethebusinesscyclebystabilizingaggregatedemand.Analyzingthismechanism
requiresamodelinwhichboththedistributionofincomeandthelevelofaggregatedemandaffect
thebusinesscycle.Ourfirstpapertakesapositiveperspective,askinghowthesocialinsurance
policiesinplaceintheUSalterthevolatilityofaggregateoutput.Wefindthatthepolicieshavelittle
stabilizingeffectinnormaltimesinlargepartbecausemonetarypolicyiscapableofstabilizing
aggregatedemandalready.Whenmonetarypolicyisinefficientorconstrained,however,thesocial
insurancesystemhasimportantconsequencesforthebusinesscycle.Werecentlycompleteda
relatedpaperthattakesanormativeperspectiveonthedesignofthesocialinsurancesysteminthe
presenceofaggregateshocksandnominalrigidities.Inouranalysis,theoptimalunemployment
benefitismuchlargerwhenweaccountfortheeffectsofstabilizingthebusinesscycle.Herewefind
alargerroleforautomaticstabilizersinpartbecauseweincorporatemorecyclicalityintherisks
thathouseholdsfaceusingtheincomeprocessestimatedinmyworkwithFatihGuvenen.2
Inthewakeofthefinancialcrisisof2008,theFedandothercentralbankshaveadopted
unconventionalapproachestomonetarypolicytostimulatetheeconomy.EmiNakamura,Jón
Steinsson,andIconsiderhowmonetarypolicyaffectstheeconomywhenhouseholdsface
uninsurableidiosyncraticincomerisks.3Inparticularwefocusonforwardguidance—aformof
unconventionalmonetarypolicyinwhichthecentralbankpromisestolowerinterestratesinthe
future.Standardrepresentativeagentmodelsusedformonetarypolicyanalysispredictan
implausiblylargeresponsetothesepolicies.Workingwithanincompletemarketsmodel,weshow
thatforwardguidanceismuchlesspowerful.Inthepresenceofuninsurableincomerisks,
householdsaccumulatesavingsasabufferagainstperiodsoflowincome.Thisbuffer-stocksavings
motivetemperstheintertemporalsubstitutioneffectsofchangesininterestrates.Further,this
temperingeffectisstrongerfortheinterestratechangesatlonghorizonsbroughtaboutbyforward
1“TheRoleofAutomaticStabilizersintheUSBusinessCycle,"Econometrica(2016).“TheAutomatic
StabilizerNatureofOptimalSocialInsurancePrograms,”workingpaper(2016).
2“AParsimoniousIncomeProcessforBusinessCycleAnalysis.”
3“ThePowerofForwardGuidanceRevisited.”ForthcomingAmericanEconomicReview.Also“The
DiscountedEulerEquation:ANote,”workingpaper(2016).
guidancepolicies.Emi,Jón,andIarecurrentlyworkingontwofollow-onprojectsthatexpand
uponourexistingworktoexplorehowthecyclicalityofthedistributionoflaborandfinancial
incomeaffectsthemonetarytransmissionmechanismandthebusinesscycleingeneral.
Athirdrelatedprojectevaluatestheeffectsofcyclicalvariationinincomerisksonhousehold
consumptionchoices.4NewevidencefromtheSocialSecurityAdministrationearningsdatahas
refinedourunderstandingofhowthedistributionofincomeevolvesduringarecession.Ina
recessionworkersfaceasubstantiallylargerriskofaseverereductionintheirearningsanda
smallerchanceofachievingsubstantialgainsinearnings.Iincorporatethesepatternsinincome
risksintoageneralequilibrium,incompletemarketsmodeloftheeconomyandaskhowthey
changethecyclicaldynamicsofaggregateconsumption.Ifindthatrecessionsareassociatedwith
largebutshort-livedspikesintheriskshouseholdsface,causingthemtoabruptlyreducetheir
consumptionforprecautionaryreasons.Ishowthatriskrosedramaticallyinlate-2008andearly2009andmyanalysisimpliesasharpreductioninaggregateconsumption,asseeninthedata.
Decision-makingandinequality.Anotherlineofmyresearchfocusesonindividualdecisionmakingandhowtherandomnessinchoicescanbeasourceofinequality.Oneproject,withFilip
Matějka,considershowindividualschooseamongdiscretealternativeswhentheyfacecostsof
acquiringinformationaboutthealternatives.5Webuildontherationalinattentionframeworkin
whichadecisionmakerisfreetoacquirewhateverinformationheorshelikesbutacquiringmore
informationiscostly.Whenweapplythisframeworktoadiscretechoicecontextwefindthe
optimalinformationprocessingstrategyresultsinchoosingamongthealternativeswith
probabilitiesthatfollowageneralizationofthemultinomiallogitmodel.Inthisgeneralizedmodel,
itisnotjustthetruevaluesofthealternativesthatdeterminethechoiceprobabilities,asinthe
standardmodel,butalsotheagent’spriorbeliefsaboutthesevalues.Therelationshipbetween
rationalinattentionandthelogitmodelisausefultoolbecauseexistingresultsinappliedtheory
thatbuildonthelogitcanbereinterpretedtostudytheconsequencesofcostlyinformation.6
Thereisapotentiallyimportantconnectionbetweenthismicroeconomicanalysisofdecisionmakingandthemacroeconomicpartofmyresearchportfolio.Inthepresenceofinformation
frictionsindividualsmaynotalwayschoosethealternativethatgivesthemthehighestutilityorthe
highestpayoff.Totheextentthatdifferentindividualsaremoreorlesssuccessfulinmaking
choicesthesefrictionsareasourceofinequality.Oneofmyprojectsexploreshowthedistribution
ofwealthisaffectedbyinformationfrictionsinassetmarketsthatimplyhouseholdsmustexert
effortinseekingoutfinancialintermediariesthatpayhighratesofreturn.7Thereisaneconomyof
scaleinmanagingaportfolioandhouseholdswithmoresavingswillhavestrongerincentivesto
exertefforttofindhighratesofreturn.Ishowthatthiseconomyofscaleleadswealthyhouseholds
tobecomeevenmorewealthyresultinginamoreunequaldistributionofwealth.
Futureresearch.Theroleofdistributionalissuesandhouseholdheterogeneityinshapingthe
businesscycleandtheeffectivenessofstabilizationpolicyisaveryactiveareaofresearch.Iplanto
continuemyworkinthisareaasmypriorityforfutureresearch.
4“Time-VaryingidiosyncraticRiskandAggregateConsumptionDynamics,”workingpaper(2016).
5“RationalInattentiontoDiscreteChoices:ANewFoundationfortheMultinomialLogitModel,”
AmericanEconomicReview(2015).
6Seeforexample,“SimpleMarketEquilibriawithRationallyInattentiveConsumers,”American
EconomicReviewP&P(2012).
7“SearchforFinancialReturnsandSocialSecurityPrivatization,”ReviewofEconomicDynamics
(2013).