Welcoming Andreas Schaab to Berkeley Economics

McClure: What initially interested you about economics?  

Schaab: I loved debate in high school. And I started my sophomore year in September 2008, just weeks before the collapse of Lehman Brothers. I can’t remember a single debate that year that wasn’t about monetary policy, rescue packages or bailouts. I think I first fell in love with economics that year, seeing the financial crisis unfold in real time, one debate at a time.

McClure: What made you decide to get a Ph.D. in economics? What interested you about macroeconomics specifically?

Schaab: The financial crisis made me appreciate the impact that macroeconomic policy can have. It made me really want to understand where business cycles come from and how we should design policies to combat recessions. So I've been interested in short-run fluctuations and stabilization policy from the beginning. And I think I was set on pursuing a PhD in economics by the time I started college.

McClure: You’ve taught at many globally renowned universities.  Why did you decide to join the Berkeley Economics Department?

Schaab: What excites me most about joining Berkeley is my incredible colleagues in the economics department. They're not only among the leaders in the field but have been so kind and generous and welcoming since day one. I look forward to learning from them and hope to find friends and mentors here for years--and decades--to come. It's rare to find a place where excellence and kindness go hand in hand, and that's what makes Berkeley so special to me.

McClure: Berkeley macroeconomists are known for specializing in empirical techniques.  As a theorist, what drew you to Berkeley?

Schaab: The most impactful work in macroeconomics is often at the intersection of theory and empirics. In the last 10 years or so in particular there has been renewed interest in cross-sectional heterogeneity (inequality) and its implications for aggregate outcomes. For example, the workhorse policy model of macroeconomics has for a long time featured a representative household as a stand-in for the complexities of consumer behavior in the US. This is still reflected to a large extent in the models used for policy analysis by the Fed and other important policy institutions. So in other words, these models feature a single household (to represent average consumption) and do not account for cross-sectional differences in the exposure of households to business cycle fluctuations and policies, or their behavior in response to them.

This recent "revolution" in macroeconomics has led to a new generation of models that feature cross-sectional heterogeneity. And what motivated this new emphasis on distributional outcomes was a combination of newly available microdata that taught us about household behavior at a more granular level and new theoretical progress that helped us better understand the implications of heterogeneity for policy transmission. Just as an example, consider the use of tax rebates as a tool to stabilize demand during a recession. The effectiveness of tax rebates relies entirely on how much households actually spend out of the income they receive. This is called the marginal propensity to consume (MPC). The older generation of policy models featured very low MPCs, around 5% or so. But we've learned from empirical work that MPCs are large on average and very unequal across households. And so it really matters to work with models that get this MPC distribution right when we want to think about the effectiveness and transmission of policies like tax rebates.

Circling back to the question: As a theorist, I am really excited to work in an environment that emphasizes empirics because I think the two perspectives really have to go together.

McClure: One branch of your work focuses on the normative implications of household heterogeneity.  What are some of the most surprising results from your work?

Schaab: There’s been a lot of policy debate around central bank mandates recently. Should we raise the inflation target? Should central banks worry about inequality and climate change? And historically, inflation targets have actually evolved substantially since their inception in the 1990s. For all our concern with central bank credibility, inflation targets don’t seem to be set in stone. But at the same time, an important role of inflation targets is to discipline the central bank and provide a commitment device of sorts. It’s a valid concern that allowing the central bank too much discretion in choosing its own target might undermine its role as a disciplining device—jeopardize the central bank’s credibility in other words.

One surprising result that’s come out of my work is that we can actually allow the central bank to adjust its own target, without undermining its credibility. What’s important is that the central bank announces and commits to target changes sufficiently far in advance. That way, it won’t be tempted to use target changes as a backdoor to accommodate inflation, say, at business cycle frequency. And we actually see institutional arrangements like this in practice. For example, the Bank of Canada has systematic inflation target reviews every 5 years.

McClure: The other branch of your work focuses on optimal policy.  The Great Financial Crisis birthed dozens of papers examining the policy response. What policy questions do you foresee emerging following the COVID-19 crisis?

Schaab: The post-COVID inflation surge has raised a lot of questions about inflation, in particular about its origin and dynamics across different production sectors. We saw an unprecedented reallocation of economic activity from services to manufactured goods and back again. And the inflationary experience across sectors played out very differently. At the same time, households are very differently exposed to different sectors. For example, we’ve known for a while that higher-income households tend to work and buy more in services sectors. So the burden of inflation falls very differently on different households. And I think there is a lot more for us to unpack and understand about these household-sector linkages.