UC Davis

This dissertation is a compilation of three essays focusing on the following topics: understanding the heterogeneous effects of corporate tax policy on businesses, understanding how tax policy influences the effectiveness of monetary policy, and exploring asymmetric effects of monetary policy. In doing so, I draw on frontier methods in quasi-experimental design paired with rich micro-level datasets that allow me to study the effectiveness of aggregate policy measures. I also complement my empirical tools with theoretical models to pin down transmission mechanisms.

The first chapter examines the impact of corporate tax policy in altering the efficacy of monetary policy. In recent decades there has been much focus in the macroeconomics literature on understanding heterogeneous effects of monetary and fiscal policy. Although numerous empirical studies have explored monetary policy transmission via various financial and non-financial factors, the theoretical frontier has continuously highlighted that separate analysis of monetary and fiscal policy may overlook important policy interactions. In this chapter, I use narratively-identified variation in marginal tax reforms in the US and show that the average impact of monetary policy depends on preceding corporate tax changes. Specifically, I find that monetary policy is more effective on employment, sales and investment for firms facing an increase in the statutory rate relative to thosewith stable statutory tax rates. Moreover, I document that monetary policy is least effective on firms that received marginal tax cuts. The empirical findings are rationalized using a New Keynesian model featuring capital and corporate taxes. The theoretical model and empirical results demonstrate that tax shifts may significantly amplify or dampen the effectiveness of monetary policy.

The second chapter of my dissertation analyzes post-WWII US corporate tax policy changes. This is part of joint work with James Cloyne and Paolo Surico, where we build two new proxies on marginal tax rate and investment tax credits and investigate the causal effects of corporate tax changes on business investment dynamics. We find that both marginal tax rates and investment tax credits are tools genuinely effective across the firm distribution, yet on average marginal tax rate changes are more effective at raising firms’ investment rates than investment tax credits. Exploiting micro-level heterogeneity, we also show that small, low-leverage, and high-growth firms are more sensitive to corporate tax policy changes, which suggests that firm characteristics may have a role in propagating the effectiveness of these tax tools. Overall, our findings provide a comparison of the two most common tools used in corporate tax policy and highlight the role of firm characteristics in studying US corporate tax policy.

Lastly, Chapter 3 documents the first micro-level evidence on the asymmetric effects of monetary policy in the US. Various studies on monetary transmission literature have documented non-linear effects of monetary policy at the aggregate level. However, there are few studies that use micro-data to explore sign-dependent monetary effectiveness at the disaggregate level. Focusing on firm-level data from 1980q3 to 2016q3, I find that monetary contractions have larger effects on firm-levelemployment, investment and sales than monetary expansions. These results are consistent with the aggregate findings in the literature and are robust to sample selection, sector-level analysis and alternative monetary policy shocks. Furthermore, I examine the role of financial characteristics in propagating the asymmetric effects of monetary policy. My findings show a larger employment and investment response to a monetary tightening for firms with small size, low leverage, high liquidity or no-dividend paying status. For the employment results, I also find firms with low leverage or high liquidity to respond more to monetary expansions; however, this effect is much weaker as compared to monetary contractions. These results provide evidence that financial characteristics have a role in propagating the asymmetric effects of monetary policy.