Alex Carrasco
Job Market Candidate
Research Fields
Macroeconomics, International Economics, Public EconomicsContact Information
Email Address
alexcm@mit.edu
Personal Webpage
alex-carrasco.com
References
Ivan Werning
Martin Beraja
Christian Wolf
The Endogenous Longevity Channel: Health Investments, Aggregate Savings, and Macroeconomic Policy
Motivated by evidence from U.S. microdata on income gradients in preventive health investment and survival, this paper studies how an endogenous longevity channel, the partial control of life expectancy through health investment, shapes macroeconomic outcomes and the design of public policy. I develop a tractable two-period overlapping-generations model in which health investment determines survival into old age and interacts with saving behavior. In a laissez-faire equilibrium, endogenous longevity generates a non-linear asset–income relationship: at low incomes, health behaves as a luxury good that dampens saving, while at higher incomes, longer expected lifespans strengthen the saving motive, making the asset policy convex. From a normative perspective, when annuity markets are incomplete, individuals extending their lifespans fail to internalize the social costs of longer survival. Under an optimal policy regime, efficiency requires a corrective tax on health investment. In more realistic second-best settings, however, health subsidies become optimal, as they both improve efficiency by compensating for annuity imperfections and enhance equity by narrowing longevity and income inequality. I then build a quantitative model disciplined by U.S. data to assess two applications: (i) how the endogenous longevity channel alters the contribution of demographic and inequality trends to the rise in aggregate saving and decline in real interest rates over the past five decades, and (ii) the welfare effects of alternative policy reforms in preventive health subsidies, pension design, and the progressivity of labor income taxation.
with Pedro Martínez-Bruera and Tomás Caravallo
Central banks conduct monetary policy to satisfy a dual mandate: stabilize inflation and the output gap. This can entail a tradeoff between the two, and the public learns over time how the central bank prefers to balance that tradeoff. We study how to optimally conduct monetary policy in that context. Rather than setting policy to stabilize current conditions, it is optimal for the central bank to build a reputation for a strong willingness to fight inflation—a hawkish reputation. When the public believes the central bank is hawkish, their short-run inflation expectations become less sensitive to shocks, making it easier for the bank to stabilize the economy. We test our theory using cross-sectional variation in private forecasts about inflation and the output gap, and show that the data are consistent with the mechanisms driving our policy prescriptions. Finally, we show that central banks can closely mimic the sophisticated optimal policy of our model by delegating policy decisions to a myopically conservative central banker.
with Diego Ascarza-Mendoza
Why do two out of three Americans claim Social Security benefits before reaching their Full Retirement Age? Why do even sufficiently rich people claim early very often? This paper resolves this puzzling phenomenon by extending a standard incomplete markets life-cycle model to incorporate health dynamics and bequest motives. Relative to the existing literature, health plays a broader role, affecting not only medical expenses and mortality but also directly the marginal utility of consumption. This role of health is disciplined using microdata on consumption, assets, income, and health from the Health and Retirement Study (HRS) and the Consumption and Activities Mail Survey (CAMS). The calibrated model successfully replicates the fraction of early claimers. Counterfactual exercises show that health-dependent preferences and bequest motives are crucial for this result. The model’s success is explained by a novel channel that comes from the interaction between the negative effect of worsening health on the marginal utility of consumption, the downward health trend because of aging, and bequest motives. These two elements reduce the gains from delaying by 1) making individuals more impatient and 2) increasing the strength of bequest motives relative to future consumption. The results suggest that governments aiming to insure against longevity must consider the complementary interaction between individual incentives to insure against longevity and health risks.
A Financial Frictions Model of FX Intervention in Emerging Market Economies
with César Vásquez
with David Florián-Hoyle
Journal of Macroeconomics, Volume 84, June 2025
We examine the role of sterilized FX interventions as a monetary policy tool in response to external shocks for dollarized emerging market economies. Our model highlights an agency problem that limits banks’ ability to secure funds in both domestic and foreign currencies, with its intensity linked to currency mismatches in the banking sector. This leads to endogenous deviations from the standard UIP condition, resulting in a non-neutral FX intervention policy. Sterilized FX interventions stabilize financial conditions not only by stabilizing real exchange rates but also by acting as a balance sheet policy that directly influences credit supply. Our quantitative analysis shows that FX policy rules that counteract exchange rate deviations reduce volatility in interest rate spreads including UIP deviations, credit, investment, and output, leading to significant welfare improvements compared to a flexible exchange rate regime.
Demographics, Real Interest Rate, and Inflation: The Role of Learning about Longevity
with Carlos Carvalho and Andrea Ferrero
Optimal Design of Pension and Health Systems in Dynamically Inefficient Economies
with Diego Ascarza-Mendoza