UC Santa Barbara

This dissertation examines how unfavorable macroeconomic conditions — climate change and credit constraints — influence economic activities and its implication for social welfare. In expecting climate change, people adapt their behavior to reduce its harm. Despite its importance, the optimal interplay between individual adaptation and climate policies is understudied. The first chapter studies optimal taxation in a general equilibrium model in which households compete against final goods producers for carbon-intensive intermediate goods. I theoretically show that an increase in market demand for carbon-intensive goods increases energy producers' marginal profit, which leads to more energy production and higher carbon emissions. In a calibrated model with heat-related mortality and cooling loads as an example, I find that the mortality social costs of carbon in 2020 are underestimated by 7% if such feedback is not considered.

Many U.S. municipalities finance public projects by issuing bonds secured by taxes. But emerging climate risks can impair the ability to pay debts due to the tax base loss from property damages. Rating agencies have been considered trustworthy arbiters of creditworthiness in financial markets. The second chapter studies how much climate risks are factored into credit ratings using wildfires and school district finances in California. Using historic wildfires as a source of salience shocks, I find that school districts with 0.08% of the tax base at risk of burning over the next 30 years face 3.22% lower credit ratings. This finding implies that the integration of climate risks in credit ratings can encourage policymakers to adapt to climate change to avoid higher borrowing costs.

The third chapter, joint with Kieran Walsh, uses the U.S. Census Bureau Household Pulse Survey to study heterogeneity in the spending response to stimulus checks. We find that while the fraction of households who use the payment for spending declines in pre-COVID incomes for the 2020 payments, this pattern changes into a U-shaped one in 2021. This is because, during crises, liquidity constraints are binding for poorer households due to a tightening of lending standards, making them anxious to consume. On the other hand, in a normalized economy, many poorer households borrow to avoid the inconvenience of not meeting unexpected expenditure needs such as car repairs or medical bills. When faced with a random splash of cash, these households use it for saving as they had previously dissaved to meet their unexpected expenditure needs. The macro state-dependence of spending propensity distribution is crucial to understanding the propagation of fiscal and monetary shocks.