Fabio Stohler

Can Public Debt crowd in Private Investment?

Abstract | DP 691 

If households self-select into a risky high-income state through investment, increased government debt can stimulate investment and improve welfare. In a heterogeneous agent endogenous growth model, government debt helps households smooth consumption and encourages investment in risky, high-return assets, crowding in aggregate growth. However, when debt becomes excessive, capital crowding out and distortionary taxation negate these benefits. Using a model calibrated to U.S. data, we show that this crowding-in effect suggests a higher optimal debt-to-GDP ratio than currently observed.

Generative Economic Modeling

Abstract  |  Latest Version

We introduce a novel approach for solving quantitative economic models: generative economic modeling. Our method combines neural networks with conventional solution techniques. Specifically, we train neural networks on simplified versions of the economic model to approximate the complete model’s dynamic behavior. Relying on these less complex sub-models circumvents the curse of dimensionality, allowing the use of well-established numerical methods. We demonstrate our approach across settings with analytical characterizations, nonlinear dynamics, and heterogeneous agents, employing asset pricing and business cycle models. Finally, we solve a high-dimensional HANK model with financial frictions to highlight how aggregate risk amplifies the precautionary motive.

Characterizing Market Expectations through Option-Implied Distributions