Working Papers

The Interest Rate Elasticity of Investment: Micro Estimates and Macro Implications
[+]Abstract

I estimate the elasticity of investment to interest rates using cross-sectional variation and high-frequency monetary shocks. My estimates imply that a 1 p.p. decrease in interest rates increases capital demand by 4% eight quarters after the shock. This indicates a significant effect of interest rates on investment but is much smaller than prominent estimates of the interest rate elasticity derived from the investment response to tax policy changes. In a quantitative model with heterogeneous firms, I show that the impulse response I estimate provides a powerful tool to discriminate between models with different frictions. The evidence favors models with external financing constraints, while models with large real adjustment costs cannot match evidence from both interest rate and tax policy shocks.

The Incidence and Efficiency of Land Value Taxation
(with Ulf Nielsson and Anders Yding)
[+]Abstract

Land value taxes are often seen as particularly desirable because the fixed supply of land implies no efficiency loss from taxation, with the entire tax burden falling on current landowners. We study the incidence and efficiency of land taxes using a unique quasi-experiment that generated persistent variation in land tax rates across Danish municipalities. In contrast to the predictions of standard, neoclassical models, we estimate a precise zero effect of land taxes on residential home prices. The precision of our estimates allows us to confidently rule out full capitalization of taxes into home prices using leading estimates of housing discount rates. Our results imply that the burden of land taxes is shared with tenants and future purchasers. We also estimate null effects of land taxes on measures of housing development, mobility, and homeownership, though we do find that older homeowners sort away from high tax areas. Our results are consistent with limited efficiency costs of land value taxation but imply that land taxes are more regressive in our setting than predicted by standard models.

From Pensions to Personnel: The Incentive Effects of Retirement Reform on Retention
(with Kristy Kim)
[+]Abstract

Private retirement plans are a crucial part of worker’s compensation in the U.S. and have long been thought to influence labor supply. This study uses a cohort-based regression discontinuity design to examine how a change in the retirement plan at the largest U.S. employer, the Federal Government, impacted the retention of employees over the entire life cycle. We find that workers with less valuable employer pensions but more portable retirement benefits were more likely to separate from the government around 15 and 30 years after beginning federal service. We find smaller, statistically insignificant effects in the first few years of employment. We also find evidence that the effects are driven by highly productive workers, identified through supplemental compensation or early promotions. Our results suggest that employees respond to changes in the value of retirement benefits by leaving employers for better outside options, but that employees may be inattentive or job-locked early in their careers. These findings demonstrate that non-wage compensation impacts labor supply decisions across a worker's lifecycle and the distribution of human capital over time, particularly in labor markets where employers compete through diverse compensation structures.

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Publications

Home Country Interest Rates and International Investment in U.S. Bonds
(with John Ammer, Stijn Claessens, and Alexandra Tabova), Journal of International Money and Finance, 2019, (95): 212–227.
[+]Abstract

We analyze how interest rates affect cross-border portfolio investments. Data on U.S. bond holdings by foreign investors from 31 countries for the period 2003–2016 and a large variety in movements in interest rates in these countries provide for a unique way to analyze shifts in investment behavior in response to interest rates. We find that low(er) interest rates, now prevailing in many advanced countries, lead to greater investment in general into the United States, with the effects generally driven by investment in (higher yielding) corporate bonds, rather than in Treasury bonds. In addition to affecting overall investments, lower interest rates at home are associated with a greater weight on corporate bonds, consistent with search-for-yield. The results are economically important and robust to controlling for a number of country-specific macroeconomic and financial conditions as well as to sample restrictions and choices of interest rate. Our findings have important policy implications in that they suggest that low interest rates can lead to shifts in the volume and composition of overseas investments.

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Resting Papers

Searching for Yield Abroad: Risk-Taking Through Foreign Investment in U.S. Bonds
(with John Ammer, Stijn Claessens, and Alexandra Tabova), February 2019
[+]Abstract

The much discussed risk-taking eects of low interest rates have been hard to doc- ument due to a paucity of data and challenges in identication. Analyzing unique, comprehensive, security-level data that capture 40 countries' entire investment in U.S. corporate bonds allows us to accurately characterize changes in riskiness and to help identify the causal mechanism. We show that declining home-country interest rates lead investors to tilt their portfolios toward riskier bonds in non-crises times. These changes occur entirely among investment-grade bonds. A 200 basis points decline leads investors to seek a 43 additional basis points yield pick-up, with eects that are even stronger when home interest rates reach very low levels. International spillovers of interest rates thus include risk taking that involves changes in the composition of bond portfolios.

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Policy Notes

"Low-for-Long" Interest Rates and Portfolio Shifts in Advanced Foreign Economies
(with John Ammer and Alexandra Tabova), December 2016