Andres Blanco Office: Lorch Hall 308 611 Tappan Street, Ann Arbor, MI 48109, USA 734-764-2917
Research Associate Federal Reserve Bank of Cleveland (Fall 2018)
Working Papers
Optimal Inflation target in an Economy with Menu Costs and Zero Lower Bound I study the optimal inflation target in a quantitative menu cost model with a zero lower bound on interest rate. I find that the optimal target is 3%, which is higher than in models used for monetary policy analysis. Key to this result is that inflation has a small effect on resources misallocation when the model features firm-level shocks, which are necessary to match the empirical distribution of price changes. Under normal conditions, the model's business cycle implications are similar to those of the Calvo model. At the zero lower bound implications differ because the endogenous price flexibility decreases with inflation. focoeconomico Revision requested (2nd round), AEJ: Macroeconomics.
We measure the proportion of real exchange rate movements accounted for by cross-country movements in relative reset prices (prices that changed since the previous period) using CPI micro data for five countries. Relative reset prices account for almost all of the real exchange rate movements. This is a challenge for most workhorse sticky price models used to generate volatile and persistent real exchange rates, in which relative reset prices are sluggish. Models where movements in relative wages are persistent and track the nominal exchange rate do replicate both the empirical properties of the real exchange rate and of the relative reset prices. focoeconomico
Aggregate Dynamics in Lumpy Economies (with Isaac Baley) New tools that link business cycle dynamics, steady state moments, and micro data for lumpy economies with heterogeneity, providing an application to investment dynamics.
What determines a firm’s value and the financial conditions it faces? To answer this question, this paper studies the unemployment accelerator, a mechanism where workers directly affect the firms’ financial conditions, and, in turn, firms’ financial conditions feedback again to the real economy. The unemployment accelerator builds on two key assumptions: a search friction in the labor market and firms’ default risk. The former assumption implies a positive relation between the firm’s value and its number of workers; the latter assumption entails a tight connection between the value of the workers and the firm’s incentives to default. We develop and estimate a model with these two frictions, together with firm-level heterogeneity and business cycle dynamics, and use to quantify the effect of workers’ value on financial conditions. In the context of our model, labor accounts for 32% and 56% of the volatility of default rate and market value respectively, and it is more important than physical capital in this regard. |
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