Quantitative Notes (Page 2 of 4)

Policy Change Index: A Simulated Example

In a recent research paper, we use the text of the People’s Daily to develop the Policy Change Index (PCI) for China, a machine-learning-based predictor of China’s policy changes. In this Quantitative Note, we provide an example in which both the text data and the change in priorities are simulated. We apply the PCI design to show that the algorithm can correctly identify the simulated change. This example allows the reader to understand and experiment with the PCI design without relying on the People’s Daily text.

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Dynamic Analysis of EITC Expansion

This Quantitative Note uses the OG-USA open source dynamic general equilibrium overlapping generations model to perform a dynamic analysis of the Brown-Khanna Grow American Incomes Now (GAIN) Act, which proposes to increase the generosity and scope of the earned income tax credit (EITC) in the United States. I show a simulation of the macroeconomic effects as well as distributional analysis resulting from the GAIN Act. I also simulate the effects of a revenue neutral GAIN Act in which an increase in the marginal income tax rates in the top two personal income brackets exactly off- sets the reduction in total federal tax revenue from the EITC expansion. In the case of the GAIN Act alone, the economy experiences short-run gains, but the increased government debt quickly crowds out in- vestment and causes the economy to start shrinking significantly. In the revenue neutral case, the cost is primarily in terms of large labor supply frictions and a reallocation of the household labor-leisure and consumption-savings decisions.

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Dynamic Analysis of Tax Cuts and Jobs Act

This Quantitative Note uses the OG-USA open source dynamic general equilibrium overlapping generations model to simulate the effect of the Tax Cuts and Jobs Act. We simulate this reform under the assumptions of a closed economy and small open economy. In both cases, the TCJA reform causes significant growth in GDP and employment between 1% and 2% per year in the first 8 years. However, the increasing debt-to-GDP ratio quickly crowds out investment and causes a drag on the economy. Wage growth can range from nearly nonexistent to a modest 0.6%, depending critically on the assumption of how much capital will flow into the country.

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