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Eric R. Young
Person

Eric R. Young

Senior Research Economist
Areas of Expertise macroeconomics of inequality, consumer finance, and computational economics
Department Research
Education
  • BA,
  • Economics and Politics,
  • Washington and Lee University,
  • 1994
  • MA,
  • Economics,
  • Southern Methodist University,
  • 1996
  • MS,
  • Economics,
  • Carnegie Mellon University,
  • 1998
  • PhD,
  • Economics,
  • Carnegie Mellon University,
  • 2001

Eric R. Young is a senior research economist in the Research Department at the Federal Reserve Bank of Cleveland, and also a Professor of Economics at University of Virginia. His research interests are the macroeconomics of inequality, consumer finance, and computational economics.

Dr. Young has a PhD and an MS in economics from Carnegie Mellon University, an MA in economics from Southern Methodist University, and a BA in economics and politics from Washington and Lee University.

Featured Publications

  • “Capital Controls and Monetary Policy in Sudden-Stop Economies.” With Michael B. Devereux, Changhua Yu. Journal of Monetary Economics, 2019. 103: 52–74.
  • “Bankruptcy and Delinquency in a Model of Unsecured Debt.” With Kartik Athreya, Juan M. Sanchez, Xuan S. Tam. International Economic Review, 2018. 59(2) :593–623.
  • “Rational Inattention and Dynamics of Consumption and Wealth in General Equilibrium.” With Yulei Luo, Jun Nie, Gaowang Wang. Journal of Economic Theory, 2017. 172: 55–87.
  • “Capital Controls or Exchange Rate Policy? A Pecuniary Externality Perspective.” With Gianluca Benigno, Huigang Chen, Christopher Otrok, Alessandro Rebucci. Journal of Monetary Economics, 2016. 84: 147–165.

    • Working Papers

      • Working Paper
        Optimal Fiscal Reform with Many Taxes
        Daniel R. Carroll André Victor D. Luduvice Eric R. Young
        08.28.2024 | WP 23-07R
        We study the optimal one-shot tax reform in the standard incomplete markets model where households differ in their wealth, earnings, permanent labor skill, and age. The government can provide transfers by raising tax revenue and has several tax instruments at its disposal: a flat capital income tax, a flat consumption tax, and a non-linear labor income tax. We compute the equilibrium and transitional dynamics for 3888 different tax combinations and find that the optimal fiscal policy funds a transfer that is above 60 percent of GDP through a combination of very high taxes on consumption and capital income. The labor tax schedule has a high average rate and more progressivity than the current US system. We explore the role of transitional dynamics, debt issuance, intergenerational disagreement, and fiscal spending rules in shaping the optimal policy. Policy is broadly similar if it is determined through majority voting rather than by a utilitarian planner.

        Topics: Public finance
      • Working Paper
        Equilibrium Multiplicity in Aiyagari and Krusell-Smith
        Kieran James Walsh Eric R. Young
        06.20.2024 | WP 24-13
        Repeatedly solving the Aiyagari (1994) model with random parameters, we construct hundreds of examples with multiple stationary equilibria. We never find multiplicity with risk aversion less than ≈ 1.49, depreciation less than ≈ 0.19, or income persistence less than ≈ 0.47, and multiplicity requires a disaster state for income. In cases with multiplicity, the lowest rental rate occurs near depreciation times the capital share. It is possible for the economy, without a change in fundamentals, to transition rationally from a higher-rate equilibrium to one with a lower rental rate, lower inequality, and lower welfare (for most agents). We also construct the first Krusell and Smith (1998) examples with multiple recursive competitive equilibria.

        Topics: Econometrics, modeling, and forecasting, Financial markets
      • Working Paper
        Consumer Bankruptcy and Unemployment Insurance
        Diego Legal Eric R. Young
        05.07.2024 | WP 24-09
        We quantitatively evaluate the effects of UI on bankruptcy in an equilibrium model of labor market search and defaultable debt. First, we ask whether a standard unsecured credit model extended with labor market search and matching frictions can account for the negative correlation between UI caps and bankruptcy rates observed in the data. The model can account for this fact only if estimated with the employment rate among bankruptcy filers as a target. Not matching this employment rate underestimates the consumption smoothing benefits of UI cap increases, as the model assigns too much importance to unemployment shocks for driving default, and implies large welfare losses from increasing the cap rather than negligible gains. Second, with bankruptcy available, there are significant welfare gains from increasing the replacement rate above the calibrated value, but not in the absence of default.

        Topics: Labor economics, Financial markets, Lending and access to credit
      • Working Paper
        Optimal Fiscal Reform with Many Taxes
        Daniel R. Carroll André Victor D. Luduvice Eric R. Young
        02.09.2023 | WP 23-07
        We study the optimal one-shot tax reform in the standard incomplete markets model where households differ in their wealth, earnings, permanent labor skill, and age. The government can provide transfers by raising tax revenue and has several tax instruments at its disposal: a flat capital income tax, a flat consumption tax, and a non-linear labor income tax. The optimal fiscal policy funds a transfer that is nearly 50 percent of GDP through a combination of very high taxes on consumption and capital income. The labor tax schedule has a high average rate but is also moderately progressive. We find an identical outcome when policy is instead determined by majority voting. Finally, we offer suggestive empirical evidence that households’ preferences for tax and redistribution are more strongly associated with political identity than economic status.

        Topics: Public finance
      • Working Paper
        The Dynamics of the Racial Wealth Gap
        Dionissi Aliprantis Daniel R. Carroll Eric R. Young
        11.29.2022 | WP 19-18R
        What drives the dynamics of the racial wealth gap? We answer this question using a dynamic stochastic general equilibrium heterogeneous-agents model. Our calibrated model endogenously produces a racial wealth gap matching that observed in recent decades along with key features of the current cross-sectional distribution of wealth, earnings, intergenerational transfers, and race. Our model predicts that equalizing earnings is by far the most important mechanism for permanently closing the racial wealth gap. One-time wealth transfers have only transitory effects unless they address the racial earnings gap, and return gaps only matter when earnings inequality is reduced.

        Topics: Economic equity and inclusion
      • Working Paper
        The Effect of Minimum Wages on Consumer Bankruptcy
        Diego Legal Eric R. Young
        08.05.2022 | WP 22-24
        We use cross-state differences in minimum wage (MW) levels and county-level consumer bankruptcy rates from 1991-2017 to estimate the effect of changes in minimum wages on consumer bankruptcy by exploiting policy discontinuities at state borders. We find that Chapter 7 bankruptcy rates are significantly lower in counties belonging to states with higher MW compared to neighboring counties in the lower MW state: a 10 percent increase in MW decreases the bankruptcy rate by around 4 percent. Before the 2005 bankruptcy reform, this effect was almost twice as large as for the entire sample. Theoretically, we cannot sign the effect of MW on bankruptcy and credit utilization; we use a stylized consumption/saving model with default to illustrate the dependence on particular parameters and to provide intuition on how to interpret our results.

        Topics: Financial well-being
      • Working Paper
        Government Debt Limits and Stabilization Policy
        Daniel Murphy Eric R. Young
        07.31.2020 | WP 20-23
        We evaluate alternative public debt management policies in light of constraints imposed by the effective lower bound on interest rates. Replacing the current limit on gross debt issued by the fiscal authority with a limit on consolidated debt of the government can ensure that output always reaches its potential, but it may permit excess government spending when the economy is away from the effective lower bound. The welfare-maximizing policy sets the gross debt limit to the level implied by Samuelson (1954), while the central bank finances government spending with money when the economy is at the effective lower bound.

        Topics: Monetary policy, Lending and access to credit
      • Working Paper
        Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus
        Jorge Miranda-Pinto Daniel Murphy Kieran James Walsh Eric R. Young
        02.27.2020 | WP 20-07
        We document that the interest rate response to fiscal stimulus (IRRF) is lower in countries with high inequality or high household debt. To interpret this evidence we develop a model in which households take on debt to maintain a consumption threshold (saving constraint). Now debt-burdened, these households use additional income to deleverage. In economies with more debt-burdened households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate. Our theoretical framework predicts that the negative relationship between the IRRF and debt only holds when credit is not restricted. It also predicts that the consumption response to fiscal stimulus is falling in debt and inequality (only during periods of relaxed credit). We perform a series of empirical tests and find support for these predictions. In doing so, we provide context to recent evidence on the debt-dependent effects of government spending by highlighting that the relationship between debt and fiscal effects varies with credit conditions.

        Topics: International economics, Lending and access to credit
      • Working Paper
        A Model of Expenditure Shocks
        Jorge Miranda-Pinto Daniel Murphy Eric R. Young Kieran James Walsh
        02.04.2020 | WP 20-04
        We document four features of consumption and income microdata: (1) household-level consumption is as volatile as household income on average, (2) household-level consumption has a positive but small correlation with income, (3) many low-wealth households have marginal propensities to consume near zero, and (4) lagged high expenditure is associated with low contemporaneous spending propensities. Our interpretation is that household expenditure depends on time-varying consumption thresholds where marginal utility discontinuously increases. Our model with consumption thresholds matches the four facts better than does a standard model. Poor households in our model also exhibit “excess sensitivity” to anticipated income declines.

        Topics: Econometrics, modeling, and forecasting, Financial well-being
      • Working Paper
        The Dynamics of the Racial Wealth Gap
        Dionissi Aliprantis Daniel R. Carroll Eric R. Young
        10.08.2019 | WP 19-18
        We reconcile the large and persistent racial wealth gap with the smaller racial earnings gap, using a general equilibrium heterogeneous-agents model that matches racial differences in earnings, wealth, bequests, and returns to savings. Given initial racial wealth inequality in 1962, our model attributes the slow convergence of the racial wealth gap primarily to earnings, with much smaller roles for bequests or returns to savings. Cross-sectional regressions of wealth on earnings using simulated data produce the same racial gap documented in the literature. One-time wealth transfers have only transitory effects unless they address the racial earnings gap.

        Topics: Economic equity and inclusion, Financial well-being
      • Working Paper
        What Explains Neighborhood Sorting by Income and Race?
        Dionissi Aliprantis Daniel R. Carroll Eric R. Young
        10.08.2019 | WP 1808R
        Why do high-income black households live in neighborhoods with characteristics similar to those of low-income white households? We find that neighborhood sorting by income and race cannot be explained by financial constraints: High-income, high-wealth black households live in similar-quality neighborhoods as low-income, low-wealth white households. We provide evidence that black households sort across neighborhoods according to some non-pecuniary factor(s) correlated with the racial composition of neighborhoods. Black households sorting into black neighborhoods can explain the racial gap in neighborhood quality at all income levels. The supply of high-quality black neighborhoods drives the neighborhood quality of black households.

        Topics: Neighborhood quality, Economic equity and inclusion
      • Working Paper
        The Politics of Flat Taxes
        Daniel R. Carroll Jim Dolmas Eric R. Young
        09.25.2019 | WP 14-42R2
        We study the political determination of flat tax systems using a workhorse macroeconomic model of inequality. There is significant variation in preferred tax policy across the wealth and income distribution. The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) essentially zero transfers. This policy is supported by a coalition of low- and middle-wealth households. Zero labor income taxation is supported by households with below average wealth, while the middle-wealth households prefer to keep the transfer (and thus other tax rates) low. We also show that the outcome is sensitive to assumptions about the voting power of household groups, the degree of wealth and income mobility, and the forward-looking nature of votes.

        Topics: Public finance
      • Working Paper
        Can Wealth Explain Neighborhood Sorting by Race and Income?
        Dionissi Aliprantis Daniel R. Carroll Eric R. Young
        06.13.2018 | WP 18-08
        Why do high-income blacks live in neighborhoods with characteristics similar to those of low-income whites? One plausible explanation is wealth, since homeownership requires some wealth, and black households hold less wealth than white households at all levels of income. We present evidence against this hypothesis by showing that wealth does not predict sorting into neighborhood quality once race and income are taken into account. An alternative explanation is that the scarcity of high-quality black neighborhoods increases the cost of living in a high-quality neighborhood for black households with even weak race preferences. We present evidence in favor of this hypothesis by showing that sorting into neighborhood racial composition is similar across wealth levels conditional on race and income.

        Topics: Neighborhood quality
      • Working Paper
        The Politics of Flat Taxes
        Daniel R. Carroll Jim Dolmas Eric R. Young
        09.06.2017 | WP 14-42R
        We study the determination of flat tax systems using a workhorse macroeconomic model of inequality. Our first result is that, despite the multidimensional policy space, equilibrium policies are typically unique (up to a fine grid numerical approximation). The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) generally low transfers. We discuss the role of three factors—the initial heterogeneity in sources of income, the mobility of income and wealth, and the forward-looking aspect of voting—in determining the equilibrium mix of taxes.

        Topics: Public finance
      • Working Paper
        Neoclassical Inequality
        Daniel R. Carroll Eric R. Young
        09.06.2017 | WP 14-32R2
        In a model with a worker-capitalist dichotomy, we show that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth generally lowers inequality, except under extreme parameterizations. In particular, the elasticity of substitution between capital and labor in production needs to be considerably greater than 1 in order for income inequality be higher with zero growth. If this condition is not met, factor prices adjust strongly causing the fall in the return to capital (the rise in wages) to reduce income inequality. Our results extend to models with endogenous growth.

        Topics: Labor economics, Econometrics, modeling, and forecasting
      • Working Paper
        Mobility
        Daniel R. Carroll Eric R. Young
        12.23.2016 | WP 16-34
        This paper studies short-run wealth mobility in a heterogeneous agents, incomplete-markets model. We include features commonly used in the literature to capture wealth inequality and find that they do little to improve the model's performance for wealth mobility. Finally, we introduce state-contingent assets, which allow households to partially span the space of labor productivity. Moving toward a more "complete" market lowers wealth mobility unless the labor income process is very persistent.

        Topics: Economic mobility
      • Working Paper
        The Piketty Transition
        Daniel R. Carroll Eric R. Young
        04.17.2015 | WP 14-32R
        A study of the effects on inequality of a "Piketty transition" to zero growth.

        Topics: Econometrics, modeling, and forecasting, Economic equity and inclusion
      • Working Paper
        Majority Voting: A Quantitative Investigation
        Daniel R. Carroll Jim Dolmas Eric R. Young
        12.31.2014 | WP 14-42
        We study the tax systems that arise in a once-and-for-all majority voting equilibrium embedded within a macroeconomic model of inequality.

        Topics: Public finance, Econometrics, modeling, and forecasting
      • Working Paper
        The Piketty Transition
        Daniel R. Carroll Eric R. Young
        12.02.2014 | WP 14-32
        A study of the effects on inequality of a "Piketty transition" to zero growth.

        Topics: Econometrics, modeling, and forecasting
      • Working Paper
        The Long Run Effects of Changes in Tax Progressivity
        Daniel R. Carroll Eric R. Young
        12.01.2009 | WP 09-13
        This paper compares the steady state outcomes of revenue-neutral changes to the progressivity of the tax schedule.
      • Working Paper
        A Note on Sunspots with Heterogeneous Agents
        Daniel R. Carroll Eric R. Young
        07.01.2009 | WP 09-06
        This paper studies sunspot fluctuations in a model with heterogeneous households.

    • Economic Commentaries

    • “Comparing Dynamic Multisector Models.” With Jorge Miranda-Pinto. Economics Letters, 2019 (forthcoming).
    • “Neoclassical Inequality.” With Daniel R. Carroll. Journal of Macroeconomics, 2018, 57: 83–109.
    • “Capital Controls and Monetary Policy in Sudden-Stop Economies.” With Michael B. Devereux, Changhua Yu. Journal of Monetary Economics, 2018 (forthcoming).
    • “Bankruptcy and Delinquency in a Model of Unsecured Debt.” With Kartik Athreya, Juan M. Sanchez, Xuan S. Tam. International Economic Review, 2018, 59(2): 593–623.
    • “Portfolio Choice with Information Processing Limits.” With Altantsetseg Batchuluun, Yulei Luo. Annals of Economics and Finance., 2018 (forthcoming).
    • “Rational Inattention and Dynamics of Consumption and Wealth in General Equilibrium.” With Yulei Luo, Jun Nie, Gaowang Wang. Journal of Economic Theory, 2017, 172: 55–87.
    • “Induced Uncertainty, the Market Price of Risk, and the Dynamics of Consumption and Wealth.” With Yulei Luo. Journal of Economic Theory, 2016, 163: 1–41.
    • “Long-run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention.” With Yulei Luo. Journal of Money, Credit, and Banking, 2016, 48(2-3): 325–362.
    • “Capital Controls or Exchange Rate Policy? A Pecuniary Externality Perspective.” With Gianluca Benigno, Huigang Chen, Christopher Otrok, Alessandro Rebucci. Journal of Monetary Economics, 2016, 84: 147–165.
    • “Slow Information Diffusion and the Inertial Behavior of Durables Consumption.” With Yulei Luo, Jun Nie. Journal of the European Economic Association, 2015, 13(5), pp. 805–840.
    • “Labor Market Upheaval, Default Regulations, and Consumer Debt.” With Kartik Athreya, Juan M. Sanchez, Xuan S. Tam. Review of Economic Dynamics, 2015, 18(1): 32–52.
    • “Signal Extraction and Rational Inattention.” With Yulei Luo. Economic Inquiry, 2014, 52(2): 811–829.
    • “Robust Control, Informational Frictions, and International Consumption Correlations.” With Yulei Luo, Jun Nie. European Economic Review, 2014, 67(1): 1–27.
    • “Model Uncertainty and Intertemporal Tax Smoothing.” With Yulei Luo, Jun Nie. Journal of Economic Dynamics and Control, 2014, 45, 289–314.
    • “Financial Crises and Macro-Prudential Policies.” With Gianluca Benigno, Huigang Chen, Christopher Otrok, Alessandro Rebucci. Journal of International Economics, 2013, 89(2): 453–470.
    • “A Quantitative Theory of Information and Unsecured Credit.” With Kartik Athreya, Xuan S. Tam. American Economic Journal: Macroeconomics, 2012, 4(3), pp. 153–183.
    • “Robust Policymaking in the Face of Sudden Stops.” Journal of Monetary Economics, 2012, 59(5): 12–527.
    • “Robustness, Information-Processing Constraints, and the Current Account in Small Open Economies.” With Yulei Luo, Jun Nie. Journal of International Economics, 2012, 88(1): 04–120.
    • “The Long-Run Effects of Changes in Tax Progressivity.” With Daniel R. Carroll. Journal of Economic Dynamics and Control, 2011, 35(9): 1451–1473.
    • “Asset Pricing under Information-Processing Constraints.” With Yulei Luo. Economics Letters, 2010, 107(1): 26–29.
    • “Risk-sensitive Consumption and Savings under Rational Inattention.” With Yulei Luo. American Economic Journal: Macroeconomics, 2010, 2(4): 281–325.
    • “Solving the Incomplete Markets Model with Aggregate Uncertainty Using the Krusell-Smith Algorithm and Non-Stochastic Simulations.” Journal of Economic Dynamics and Control, 2010, 34(1): 36–41.
    • “The Wealth Distribution and the Demand for Status.” With Yulei Luo. Macroeconomic Dynamics, 2009, 13(S1): 1–30.
    • “Unsecured Credit Markets Are Not Insurance Markets.” With Kartik Athreya, Xuan S. Tam. Journal of Monetary Economics, 2009. 56(1): 83–103.
    • “Rational Inattention and Aggregate Fluctuations.” With Yulei Luo. BE Journal of Macroeconomics (Contributions), 2009, 9(1), Article 14.
    • “The Stationary Distribution of Wealth under Progressive Taxation.” With Daniel R. Carroll. Review of Economic Dynamics, 2009, 12(3), pp. 469–478.
    • “Generalized Quasi-Geometric Discounting.” Economics Letters, 2007, 96(3): 343–350.
    • “Unemployment Insurance and Capital Accumulation.” Journal of Monetary Economics, 2004, 51(8): 1683–1710.
    • “Money Creation, Reserve Requirements, and Seigniorage.” With Joseph H. Haslag. Review of Economic Dynamics, 1998, 1(3): 677–698.

  • Book Chapters

    • “Model Uncertainty, State Uncertainty, and State-Space Models.” With Yulei Luo, Jun Nie. In Wu, Shu and Yong Zeng (eds.), State Space Models—Application in Economics and Finance. Springer-Verlag Press, 2013, 91–112.
    • “Revisiting Overborrowing and Its Policy Implications.” With Gianluca Benigno, Huigang Chen, Christopher Otrok, Alessandro Rebucci. In Cespedes, Luis Felipe, Roberto Chang, and Diego Saravia (eds.), Monetary Policy under Financial Turbulence, Central Bank of Chile, 2011, 145–184.

    Other Federal Reserve Publications

    • “Loan Guarantee Programs for Unsecured Consumer Credit Markets.” With Kartik Athreya, Xuan S. Tam. Federal Reserve Bank of Richmond Economic Quarterly, 2014, 100(4): 297–352.
    • “Debt Default and the Insurance of Labor Income Risk.” With Kartik Athreya, Xuan S. Tam. Federal Reserve Bank of Richmond Economic Quarterly, 2012, 98(4): 255–307.