Contact Information
Department of Economics
Northwestern University
2211 Campus Drive
Evanston, IL 60208
E-mail: michaelcai@u.northwestern.edu
Personal website: www.michaelcai.com
Education
Ph.D. in Economics, Northwestern University, 2025 (expected)
B.S. summa cum laude in Economics, New York University Stern School of Business, 2017
Field of Specialization
Macroeconomics
Curriculum Vitae
Job Market Paper
“Explaining the Macroeconomic Inertia Puzzle”
Many macroeconomic models struggle to explain the sluggish response of aggregate variables to sudden shocks and changes in policy. While numerous theories of adjustment frictions and bounded rationality have been proposed to explain this macroeconomic inertia, no consensus has emerged among them. I show that canonical heterogeneous-agent models—the Blanchard (1985) perpetual youth and Bewley (1986) incomplete markets models—are consistent with aggregate consumption inertia if agents’ average expectations align with survey expectations of income and interest rates. To determine the causes and analyze the policy implications of inertia, I adopt a model of frictional Bayesian learning that can explain patterns of forecast errors in expectations data that existing theories struggle to account for. Incorporating this form of learning into a standard heterogeneous-agent New Keynesian environment, I provide a theory for how inertia arises endogenously. Inertia results when the equilibrium amplification of an initial shock exceeds expectations, causing expectations to slowly become unanchored. This theory yields a novel drawback to inertial monetary policy rules and the delayed financing of fiscal deficits: Policy regimes that act more gradually experience longer transmission lags.
Working Papers
“Optimal Long-Run Fiscal Policy with Heterogeneous Agents”
(with Adrien Auclert, Matthew Rognlie, and Ludwig Straub)
We introduce a new method for characterizing the steady state of dynamic Ramsey problems, building on the dual approach to optimal taxation. Applying this method to standard calibrations of heterogeneous-agent models a la Aiyagari (1995), we find that in many cases Ramsey steady states do not exist, with our results suggesting that long-run immiseration is optimal instead. When Ramsey steady states do exist, they are associated with optimal long-run labor income taxes close to 100%. We show that these conclusions are related to strong anticipatory effects of future tax changes.
Publications
“Online Estimation of DSGE Models”
(with Marco Del Negro, Edward Herbst, Ethan Matlin, Reca Sarfati, and Frank Schorfheide)
The Econometrics Journal: Volume 24, Issue 1, Jan 2021, Pg. C33-C58
“DSGE Forecasts of the Lost Recovery”
(with Marco Del Negro, Marc P. Giannoni, Abhi Gupta, Pearl Li, and Erica Moszkowski)
International Journal of Forecasting: Volume 35, Issue 4, Oct-Dec 2019, Pg. 1770-1789
Teaching
Econ 311: Intermediate Macroeconomics (Fall 2021; Spring 2023)
Teaching evaluations are available here.
References
Prof. Matthias Doepke (Committee Chair)
Prof. George Marios Angeletos
Prof. Matthew Rognlie