Alexis Akira Toda

Alexis Akira Toda

Mathematical economist

My unpublished COVID-19 paper is now my most cited paper

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Recently, my working paper Susceptible-Infected-Recovered (SIR) Dynamics of COVID-19 and Economic Impact has surpassed my JEBO paper in terms of citation counts, and has become my most cited paper. My COVID-19 paper is one of the very first written by an economist on this topic, and it appeared in the first issue of the working paper series Covid Economics. Although I am no longer working on this paper since the situation with COVID-19 has been changing too quickly (especially when I wrote the paper in March 2020) to keep up with, I am glad that this paper has made some impact. In fact, it was featured in VoxEU and Fortune articles.

Although the data analysis in my COVID-19 paper is now completely outdated, I believe its message is still valid. From the very beginning of the COVID-19 epidemic, I have been consistently skeptical of drastic mitigation measures such as closure of schools, restaurants, and other businesses. These measures work only in totalitarian countries where the government has the ability to enforce the lockdown, and probably appear to work in such countries because totalitarian regimes do not report cases accurately anyway. It is unfortunate that US (in particular, California) has (at least initially) implemented draconian measures. Although I have no ability to do research in applied microeconomics, I am sure one can estimate the causal effects of lockdown on economic outcomes, education achievement, suicide, etc., and those negative effects will be big. The problem with lockdown is that it ignores the tradeoff between lives and everything else, and it is not even clear whether it saves lives (because the pandemic will not end until we achieve herd immunity, and lockdown only delays herd immunity). I think policy makers should focus on mild measures such as mask-wearing and hand-washing, which have clear benefits and little cost for implementation. Though not many people are saying so openly, I think we are moving in that (right) direction.

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Nonexistence of Rational Bubbles in Miao and Wang (2018)

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Jianjun Miao of Boston University and Pengfei Wang of Peking University published a paper titled “Asset Bubbles and Credit Constraints” at American Economic Review in 2018. In their abstract, they state that they “provide a theory of rational stock price bubbles”. For those who are not familiar with the economic theory of bubbles, “rational bubble” means that the asset price (denoted by \(P\)) exceeds its fundamental value (denoted by \(V\)) defined by the present value of dividends, so \(P>V\), in a model in which agents are rational.

Most papers in the rational bubble literature assume that the asset pays no dividends, because there are known difficulties with positive dividends. (I can talk about this more but it is technical, so I refer the reader to my JME review article with Tomohiro Hirano, especially Section 3.4.) Miao and Wang’s paper is ambitious because they claim to attach a rational bubble to a dividend-paying asset. For instance, in their literature review, they state

Some studies (e.g., Scheinkman and Weiss 1986; Kocherlakota 1992, 2008; Santos and Woodford 1997; Hellwig and Lorenzoni 2009) have found that infinite-horizon models of endowment economies with borrowing constraints can generate rational bubbles. Unlike this literature, our paper analyzes a production economy with stock price bubbles attached to productive firms.

Here the cited papers are all rational bubble models. Subsequent papers by the authors also advertise Miao and Wang (2018) as a rational bubble model. For example, Footnote 4 of Dong, Miao, and Wang (2020) states

Introducing dividends or rents will complicate our analysis without changing our key insights. See Miao and Wang (2018) and Miao, Wang, and Xu (2015) for models of rational bubbles attached to assets with dividends or rents.

In a recent working paper by Tomohiro and I titled “Rational Bubbles: A Clarification”, we mathematically proved the nonexistence of rational bubbles in the model of Miao and Wang (2018). In other words, \(P=V\) in their model.

It seems that there is a widespread misunderstanding in the literature. According to our systematic literature search detailed in the paper, there are 74 papers that are mainly about the theory of bubbles and cite Miao and Wang (2018) as a paper on bubbles. Among those 74 papers, 68 cite Miao and Wang (2018) as a rational bubble model specifically. As proved in our paper, the model of Miao and Wang (2018) is not a rational bubble model. It is an asset pricing model with multiple equilibria, where the high- or low-stock price equilibrium is selected based on agents’ self-fulfilling expectations. In both equilibria, the stock price reflects fundamentals. I hope that our paper will help to reach a better and mutual understanding about bubbles, and that the science of bubbles will prosper forever, without ever imploding.

Backdoor Roth

2 minute read

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I have been investing in Roth IRA. Currenty the contribution limit is $7,000/year.

I haven’t been paying attention much, but there are income limits for traditional and Roth IRA. For traditional, married couples filing jointly cannot deduct contributions if their modified adjusted gross income (MAGI) is above $136,000. For Roth, married couples filing jointly cannot contribute if their MAGI is above $240,000.

Because I recently got a raise by changing employer, I can no longer contribute to Roth. However, there is a legal loophole called backdoor Roth. All you need is to contribute to a traditional IRA (which is not tax deductible due to the income limit but this is irrelevant) and then do a Roth conversion. This way, anybody can contribute to Roth regardless of their income. So from next year on, I can simply contribute $7,000 of cash to my traditional IRA account, do a Roth conversion, and invest the funds in whatever way I like.

However, for this year there is a problem because I have already contributed to Roth before I knew I would exceed the income limit. I did a bit of research and found this article. Reading it, I did the following.

  1. First, I recharacterized this year’s Roth contributions to traditional.
  2. Then, I contributed cash to traditional to hit the annual contribution limit.
  3. Finally, I converted all funds from traditional to Roth.

The idea is that, by recharacterizing my existing Roth contributions to traditional, it’s as if I contributed to traditional in the first place. To save my mental resource, I added sufficient cash to hit the $7,000 annual contribution limit right away so that I can forget about it for this year. Because the existing contributions to Roth had capital gains, by recharacterizing to traditional, I will have to pay capital gains taxes. This TurboTax article explains how to handle taxes.

It’s fun to learn something new about money tips, but I spent a few hours of my time doing so. Since the income limit for Roth is not binding due to the backdoor Roth loophole, it would make more sense for the government to simply eliminate the income limit for Roth altogether. And if there is no income limit for Roth, there should be no limit for traditional either. Our lives will be much simpler that way.

Farewell, UCSD

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As I have already announced on my website, I am resigning from UCSD. Today is my last day. I have been employed for 11 years, so I have bittersweet feelings for sure.

Trip to Japan

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I have just returned from a 10-day trip to Japan. During this short stay, I went to the Ikaho hot spring, did some sightseeing in Tokyo with my family, and gave talks at Waseda University and University of Tokyo.