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Designing Effective Public Policies

Periodic Reporting for period 1 - DEPP (Designing Effective Public Policies)

Reporting period: 2016-06-01 to 2017-11-30

The project intended to identify and work on a number of projects in public economics, with links to other fields such as macro, real estate, labor, and gender economics. The project evolved around several large administrative datasets from the UK and Denmark, and they advanced approaches and methodologies that have recently been developed in public economics into new areas. There was a strong public policy focus running through the project, including tax policy, transfer policy, family policy, and indirectly monetary policy. The objective was to achieve a comprehensive understanding of how government interventions affect two key markets: the housing market and the labor market.
The project was divided into two themes. The first theme focused on the housing market and was divided into three subprojects. The first project investigated the effects of mortgage interest rates on leverage and house prices, and it developed a new quasiexperimental method for estimating the elasticity of intertemporal substitution in consumption, a crucial parameter for many public policies. The second and third projects investigated housing market responses to different tax policies, focusing on how such responses are magnified by liquidity constraints and leverage.
The second theme focused on the labor market and was divided into two subprojects. The first project studied secular changes in gender inequality and the underlying sources of those changes, focusing mainly on the effects of child rearing on gender
inequality. The project explored the underlying mechanisms driving child-related inequality, including gender identity norms and family policies. The second project intended to propose a new way of estimating macro labor supply elasticities that integrates taxes and public expenditures, and it develops a theoretical framework to draw policy implications from those estimations.
This report covers the first year of the project. However, since the project was terminated after one year (due to my move to Princeton University), this is also the lifetime of the project. The first year of the project was extremely productive and I have manage to complete a fairly large part of the project. Below I list the papers I have written so far, organized into the research themes in the original proposal:

Theme 1: Public Policies in the Housing Market
“The Effect of House Prices on Household Borrowing: A New Approach” (with James Cloyne, Kilian Huber, and Ethan Ilzetzki), Working Paper, Revised January 2018. Under review at the American Economic Review.
“Do People Respond to the Mortgage Interest Deduction? Quasi-Experimental Evidence from Denmark” (with Amalie Sofie Jensen and Jonathan Gruber), Working Paper, July 2017. R&R at the American Economic Journal: Economic Policy.
“Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches” (with Michael Best, James Cloyne, and Ethan Ilzetzki), Working Paper, Revised November 2017. Under review at the Review of Economic Studies.
“Housing Market Responses to Transaction Taxes: Evidence from Notches and Stimulus in the UK” (with Michael Best), forthcoming in the Review of Economic Studies.

I note that the last paper on this list was started before the ERC grant (and was discussed in the research proposal). I include it here because we revised and expanded this paper considerably in order to address some of the questions set out in the proposal.

Theme 2: Children and Gender Inequality in the Labor Market
“Children and Gender Inequality: Evidence from Denmark” (with Camille Landais and Jakob Søgaard), Working Paper, Revised February 2017. Under review at the American Economic Journal: Applied Economics.
“Gender Inequality and Economic Development: Fertility, Education, and Norms” (with Camille Landais), Economica 84, 180–209, 2017.

The listed papers contribute several new approaches and methodologies. Let me highlight a few. In “The Effect of House Prices on Household Borrowing: A New Approach”, we develop a completely new approach to identifying the impact of house prices on borrowing. This includes a new way of estimating the collateral channel. In “Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches” we push the “bunching approach” in new directions. This includes a new way of obtaining counterfactuals, and it includes combining the bunching design with structural estimation. In “Children and Gender Inequality: Evidence from Denmark” we develop an event study design that can be used to identify the causal effect of having children on the labor market outcomes for women and men (and the implied effects on gender inequality). While the event study design is not new in and of itself, we develop the design in new directions and demonstrate precisely how it can be used to obtain causal effects.