Structural Transformation and the Transmission of Monetary Policy

This paper studies how the long-term sectoral shift in economic activity toward services has increased the effectiveness of monetary policy in the United States. I study the role of sectoral differences between goods and services in price rigidity and in demand composition across the income distribution---two features I document in the data. I develop a two-sector heterogeneous-agent model with sector-specific nominal rigidities and non-homothetic preferences to quantify their implications for monetary policy transmission. The shift toward services between 1970 and 2019 strengthened the effectiveness of monetary policy by 21%. As services prices are less responsive than goods prices, structural transformation raises aggregate price rigidity, flattens the Phillips curve, and amplifies the short-run transmission of monetary policy. Low-wealth households bear the largest welfare loss after a contractionary shock, with structural transformation amplifying these distributional effects. Finally, while structural transformation amplifies the impact of monetary policy shocks, it dampens the effects of supply shocks by shifting activity toward a less price-volatile sector.

The Heterogeneous Effects of Supply Shocks in Necessity Goods

We show that the evolution of the relative price of necessities through recessions is quite heterogeneous. We study the welfare effects of these recessions in a heterogeneous-agent model with necessity and luxury goods, in which the response of the relative price of necessities to a productivity shock depends on which sectors are affected. In the model, recessions that coincide with a larger rise in the relative price of necessities worsen the welfare of low-income households more, since these households are more exposed to necessity goods. We then study the efficacy of price subsidies---implemented through lower value-added taxes---in mitigating welfare losses from sectoral productivity shocks. A subsidy that lowers the price of necessity goods is welfare-reducing: high-income households respond disproportionately even though these goods account for a smaller share of their consumption. In contrast, cash transfers, especially if targeted to low-income households, partly mitigate the welfare losses associated with sectoral supply shocks. Central to our findings is that the model aligns closely with the empirically observed non-homothetic behavior of households and the imperfect pass-through, which we also document.

The Full, Persistent, and Symmetric Pass-Through of a Temporary VAT Cut

We investigate the pass-through of a temporary value-added tax (VAT) cut on selected food products to consumer prices in Portugal. Exploiting a novel data set of daily online prices, we find that the VAT cut was fully transmitted to consumer prices, persisted throughout the policy duration, and prices returned to the pre-implementation trend after reversal. We discuss two potential mechanisms driving this result: the policy’s salience to consumers in a high-inflation environment and the decline in producer prices when implemented. We estimate that the policy reduced the inflation rate by 0.68 percentage points on impact.

The Costs of Building Walls: Immigration and the Fiscal Burden of Aging in Europe

In low-fertility societies, reducing working-age immigration creates a convex policy frontier: it disproportionately raises dependency ratios, requiring higher tax burdens. We quantify this mechanism using a demographic model and novel estimates of immigrants’ fiscal contributions in the euro area, where lifetime net tax contributions are negative. Halting immigration increases the average tax burden by 1 percent of GDP, or €845/year for the average 30-year-old native. Immigration improves fiscal balances even when migrants are low-skilled, if their lifetime contributions exceed those of newborn natives. Raising fertility offers no comparable relief. Differences across countries are substantial, reflecting their positions on the frontier.