David Lindequist

 

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Greener Thy Neighbor? On the Welfare Effects of Protectionist Climate Policy (with Saumya Deojain)

​(revisions requested at Journal of Environmental Economics and Management)

The world is witnessing a surge in green industrial policies, with prominent examples such as the U.S. Inflation Reduction Act (IRA) incorporating significant protectionist elements. While economists have traditionally cautioned against protectionism due to its distortive effects, we argue that in the case of climate policies, these distortions can have strategic value by facilitating coordination between countries on climate action. We present a simple model that blends a standard abatement game with a beggar-thy-neighbor game, leading to multiple potential equilibria. Using techniques from the global games literature, we show that uncertainty surrounding the distortions caused by protectionist policies yields a unique equilibrium. We find that protectionist climate policies improve welfare when expected distortions are low, as they promote coordination on climate change mitigation at relatively modest costs. For high expected distortions, protectionist policies are welfare-neutral, as countries are unlikely to adopt them. For intermediate expected distortions, protectionist policies are most harmful, combining a high probability of coordination failure with substantial costs. Our findings suggest that regulators like the WTO could enhance global welfare by limiting, but not entirely banning, protectionist climate policies, especially in the absence of effective climate agreements.

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Diversity Taxes: Linking Identity Expression, Social Contact, and Taxation (with Saumya Deojain)

(revisions requested at Journal of Public Economic Theory)

The sociological literature suggests that within diverse communities, individuals create externalities on members of other social groups when they express identity through the consumption of market goods. Positive identity expression externalities lead individuals to increase their exposure to out-group identity expression, while negative externalities lead them to reduce it. At the same time, to the extent that identity expression is tied to market consumption, fiscal policy can influence how much identity is expressed by affecting individuals’ disposable income. We develop a theoretical framework in which identity expression externalities are addressed through these two channels: individuals privately adjust their social contacts to manage exposure, while local governments can use taxation to influence the visibility of identity in shared spaces. We study how these mechanisms interact, and how policy depends on which social group the government prioritizes and whether individuals react favorably or unfavorably to out-group expression. We find that governments amplify the behavioral response to diversity by adjusting the intensity of identity signaling through tax policy. We also show that greater openness to diversity can reduce demand for taxation, leading to more visible identity expression but also more private avoidance.​

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Forward Guidance and the Yield Curve (with Jonathan Wolff)

An inverted yield curve has traditionally predicted recessions by signaling market expectations of falling short-term interest rates. We document a structural break in June 2009 that weakens this predictive relationship. Using a New Keynesian model with Epstein-Zin preferences and stochastic volatility, we show that forward guidance compresses the term premium and flattens the yield curve. By reducing the risk households associate with holding long-term bonds, forward guidance dampens the response of yields to shifting economic conditions. The model replicates the decline in predictive power observed in the data, suggesting that forward guidance has muted the yield curve's informational content.

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The Common Currency Channel of Risk Sharing

Conventional wisdom holds that a common currency deprives countries of a key policy tool for responding to domestic shocks. This paper explores the extent to which a common currency may simultaneously create a channel for cross-country risk sharing. I present a simple monetary model in which the central bank redistributes liquidity after asymmetric productivity shocks, refinancing current account deficits on favorable terms and channeling resources from surplus to deficit members without compromising the inflation target. Re-examining ECB policy during the 2008–2014 Eurocrisis, I show that this “common currency channel” enabled large intra-Eurosystem transfers and reduced the pass-through of GDP shocks to consumption by roughly 55 percentage points in the early crisis years, when capital market and fiscal channels provided little insurance. The results suggest that a common currency can substitute for traditional risk-sharing mechanisms when those mechanisms are weak or absent.

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Has the World Become More Interconnected? Distance and GDP Comovements Over Time (with Josh Ederington, Yoonseon Han, and Jenny Minier)

It is commonly assumed that the drastic decline in trade costs over the past century has made the world more interconnected and reduced the importance of physical distance. However, empirical gravity regressions show that distance continues to play an important role in explaining trade flows. We investigate whether physical distance has also continued to affect GDP comovements between countries: that is, is it still the case that neighboring countries are more likely to have synchronized business cycles than countries further apart? We show that, while geographic distance was a significant predictor of GDP comovements between 1955-2000, this effect disappears after 2000. Thus, we find evidence for the "death of distance" when it comes to GDP comovements.

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