Wealth, Returns, and Economic Policy

<p dir="ltr">In the United States, households differ not only in their incomes but also in the rates of return that they earn on their investments. My dissertation studies how these differences in returns shape the economy's response to policy and influence the degree of social mobility. The first two chapters examine the implications of return and wealth heterogeneity for monetary and fiscal policy. The third chapter shows that accounting for differences in household returns improves our understanding of mobility-how households change places within the wealth distribution. </p><p dir="ltr">In Chapter 1, entitled "Redistribution and Reallocation: Monetary Policy with Return Heterogeneity," I study the aggregate and distributional effects of monetary policy when households face idiosyncratic return risk, and make levered investments. When high-return households make levered investments, a decrease in the policy rate redistributes assets to- wards these wealthier households. This redistributive channel causes monetary policy shocks to increase both aggregate Total Factor Productivity and wealth inequality, as they do in the data. The endogenous change in productivity amplifies the effect of the shock and flattens the Phillips curve, implying that the overall effect of a change in monetary policy is determined by the amount of redistribution that it induces. As a result of two countervailing forces, the power of monetary policy is hump-shaped in the degree of wealth inequality: monetary policy has small effects on output at low and high values of inequality, and larger effects for intermediate wealth inequality. Calibrating my model to the data suggests that the increase in wealth inequality from 1970-2022 can account for some of the decrease in the effect of monetary policy on output documented over the same period. </p><p dir="ltr">In Chapter 2, entitled "Optimal Taxation of Wealthy Individuals," Ali Shourideh and I characterize the optimal nonlinear taxation of capital income in an environment in which agents earn heterogeneous returns on their investments. Agents in our model can borrow and lend to one another at a common, risk-free rate, and invest in private business with idiosyncratic returns. In a static setting, we demonstrate that income streams from both sources should be taxed at positive, differential rates. Through the tax code, the government controls both the intensive and extensive margins of entrepreneurship, ensuring both thatthe correct agents invest a positive amount in their private business, and that these agents invest the socially-optimal amount. For this reason, the optimal distortion on capital income is non-monotonic: the wedge rises for agents whom the government would like to discourage from entry into business ownership (extensive margin), and then falls for agents who do invest to ensure that they do so optimally (intensive margin). In the infinite-horizon extension, we take advantage of a homogeneity result to show that the distortions introduced by the optimal tax code are independent of an agent's history of shocks, and instead depend only on his current shock. Going forward, we are calibrating our dynamic economy to US data, in order to weigh in on the optimal level of long-run wealth inequality, as compared to its empirical counterpart. </p><p dir="ltr">In Chapter 3, entitled "Mobility," Daniel Carroll, Eric R. Young, and I study wealth mobility, the rate at which households change their position relative to one another in the wealth distribution. The US wealth data show a substantial amount of wealth mobility over short horizons. A standard heterogeneous-agents, incomplete markets model with labor income risk generates far less wealth mobility than in the data, even with the addition of standard augmentations to the income process that produce realistic wealth inequality. Agents facing income risk self-insure, accumulating assets to smooth consumption. This self- insurance motive slows the pace with which agents move through the wealth distribution. In the data, we find that families that make large moves through the wealth distribution over short time periods are more likely to receive shocks directly to their wealth, such as capital gains or losses from ownership of stocks or business. We find that incorporating idiosyncratic return risk produces mobility in line with the data. Across models that produce equal wealth inequality, the agents' preferred tax rate on capital income varies with the level of wealth mobility.</p>