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1. Can Deficits Finance Themselves?

   https://doi.org/10.3982/ECTA21791  

   Angeletos, George-Marios; Lian, Chen; Wolf, Christian K (September 2024, Econometrica)

   We ask how fiscal deficits are financed in environments with two key features: (i) nominal rigidity, and (ii) a violation of Ricardian equivalence due to finite lives or liquidity constraints. In such environments, deficits can contribute to their own financing through two channels: a boom in real economic activity, which expands the tax base; and a surge in inflation, which erodes the real value of nominal government debt. Our main theoretical result establishes that this mechanism becomes more potent as fiscal adjustment is delayed, leading to full self‐financing in the limit: if the monetary authority does not lean too heavily against the fiscal stimulus, then the government can run a deficit today, refrain from tax hikes or spending cuts in the future, and still see its debt converge back to its initial level. We further demonstrate that a significant degree of self‐financing is achievable when the theory is disciplined by empirical evidence on marginal propensities to consume, nominal rigidities, the monetary policy reaction, and the speed of fiscal adjustment. 

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2. Managing Financial Risk Trade‐Offs for Hydropower Generation Using Snowpack‐Based Index Contracts

   https://doi.org/10.1029/2020WR027212  

   Hamilton, Andrew L.; Characklis, Gregory W.; Reed, Patrick M. (October 2020, Water Resources Research)

   Abstract Hydrologic variability poses an important source of financial risk for hydropower‐reliant electric utilities, particularly in snow‐dominated regions. Drought‐related reductions in hydropower production can lead to decreased electricity sales or increased procurement costs to meet firm contractual obligations. This research contributes a methodology for characterizing the trade‐offs between cash flows and debt burden for alternative financial risk management portfolios, and applies it to a hydropower producer in the Sierra Nevada mountains (San Francisco Public Utilities Commission). A newly designed financial contract, based on a snow water equivalent depth (SWE) index, provides payouts to hydropower producers in dry years in return for the producers making payments in wet years. This contract, called a capped contract for differences (CFD), is found to significantly reduce cash flow volatility and is considered within a broader risk management portfolio that also includes reserve funds and debt issuance. Our results show that solutions relying primarily on a reserve fund can manage risk at low cost but may require a utility to take on significant debt during severe droughts. More risk‐averse utilities with less access to debt should combine a reserve fund with the proposed CFD instrument in order to better manage the financial losses associated with extreme droughts. Our results show that the optimal risk management strategies and resulting outcomes are strongly influenced by the utility's fixed cost burden and by CFD pricing, while interest rates are found to be less important. These results are broadly transferable to hydropower systems in snow‐dominated regions facing significant revenue volatility. 

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3. Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets

   https://doi.org/10.1093/restud/rdab004  

   Gavazza, Alessandro; Lanteri, Andrea (March 2021, The Review of Economic Studies)

   Abstract This article studies equilibrium dynamics in consumer durable goods markets after aggregate credit shocks. We introduce two novel features into a general-equilibrium model of durable consumption with heterogeneous households facing idiosyncratic income risk and borrowing constraints: (1) indivisible durable goods are vertically differentiated in their quality and (2) trade on secondary markets at market-clearing prices, with households endogenously choosing when to trade or scrap their durables. The model highlights a new transmission mechanism for macroeconomic shocks and successfully matches several empirical patterns that we document using data on U.S. car markets around the Great Recession. After a tightening of the borrowing limit, debt-constrained households postpone the decision to scrap and upgrade their low-quality cars, which depresses mid-quality car prices. In turn, this effect reduces wealthy households’ incentives to replace their mid-quality cars with high-quality ones, thereby decreasing new-car sales. We further use our framework to evaluate targeted fiscal stimulus policies such as the Car Allowance Rebate System in 2009 (“Cash for Clunkers”). 

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4. Fiscal Capacity: An Asset Pricing Perspective

   https://doi.org/10.1146/annurev-financial-110921-103651  

   Jiang, Zhengyang; Lustig, Hanno; Van Nieuwerburgh, Stijn; Xiaolan, Mindy Z. (November 2023, Annual Review of Financial Economics)

   This review revisits the literature on fiscal capacity using modern tools from asset pricing. We find that properly accounting for aggregate risk substantially reduces fiscal capacity. In this environment, the gap between the risk-free rate and the expected growth rate is not a sufficient statistic for fiscal capacity. To borrow at the risk-free rate when aggregate growth is risky, governments need to ask taxpayers to insure bondholders against aggregate risk, but governments in advanced economies tend to insure taxpayers against aggregate risk. We use this asset pricing perspective to review alternative mechanisms to boost fiscal capacity that have been explored in the literature. 

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5. Views From State-Level Policy Actors About the US Federal Government COVID-19 Response

   https://doi.org/10.1089/hs.2023.0125  

   Jones, Jeff; Barnhill, Anne; Esmonde, Katelyn; Hutler, Brian; Johns, Michaela; Faden, Ruth (February 2025, Health Security)

   The United States takes a federalist approach to pandemic responses while the bulk of pandemic powers sits at the state level. Thus, comprehensive accounts of how state health officials managed the crisis and how the federal government affected those efforts are needed to better understand the governmental response to the COVID-19 pandemic. This article reports the results of semistructured interviews with 29 state-level policy actors from 16 US states. Interviewees discussed multiple aspects of the US federal COVID-19 response that affected the response in their states, including communications with the public, intergovernmental communications, and federal actions regarding various aspects of health service preparedness including emergency funding, procurement, testing capacity, vaccine development and distribution, and data systems. This research enriches the discussion about US pandemic preparedness and response, and indicates that alignment of public communications across government levels, enhanced intergovernmental communication, inclusion of rural perspectives, and federal investment in and sustainment of health service preparedness are key factors that can improve future US pandemic responses. 

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