Research

Job Market Paper

Informational Costs and Allocative Inefficiency of Inflation Uncertainty - Draft

Abstract. This paper proposes a theory in which inflation uncertainty reduces the informativeness about relative prices and analyzes the resulting effects on strategic pricing decisions and welfare. Consumers use observed prices to form beliefs about aggregate and relative components of prices and can decide to search if they think the prices they observe are not advantageous. Firms set prices strategically understanding the effect that prices have on consumers' beliefs and search behavior. Firms' pricing and households' beliefs arise jointly in equilibrium from the optimal actions of both types of agents. In equilibrium, informational effects make consumers' search response less price-sensitive as inflation uncertainty rises. This change in demand behavior prompts firms to raise markups and increases price dispersion. These factors are sources of first-order welfare losses due to distortions to consumption and labor decisions, as well as cross-sectional misallocation. These results indicate inflation uncertainty can generate meaningful welfare losses by degrading the allocative efficiency prices, even though monetary shocks are close to being neutral.

Published Papers

News of disinflation and firms’ expectations: New causal evidence with Miguel Mello and Jorge Ponce, Journal of International Money and Finance 137 (2023): 102914.

Abstract. We causally identify how firms’ inflation and growth expectations respond to information about a comprehensive reform in the monetary policy framework by means of a randomized control trial. The reform is intended to lower inflation significantly in the coming years, making this experiment unique relative to previous ones that are carried out in stable and consolidated monetary policy frameworks. Firms treated with information about the reform lower their inflation and cost expectations by about 0.5 percentage points, with the effect being persistent six months after the treatment. Treated firms also expect temporarily lower GDP growth.

Poverty alleviation strategies under informality: evidence for Latin America with Sebastián Galiani and Federico Weinschelbaum, Latin American Economic Review 28.1 (2019): 1-40. 

Abstract. Strategies based on growth and inequality reduction require a long-run horizon, and this paper therefore argues that those strategies need to be complemented by poverty alleviation programs. With regards to such programs, informality in Latin America and the Caribbean is a primary obstacle to carrying out means-testing income-support programs, and countries in the region have therefore mostly relied on proxy means-testing mechanisms. This paper studies the relative effectiveness of these and other mechanisms by way of a formal model in which workers choose between job opportunities in the formal and informal sectors. Although the means testing mechanism allows for a more pro-poor design of transfers, it distorts labor decisions made by workers. On the other hand, (exogenous) proxy means testing does not cause distortions, but its pro-poor quality is constrained by the power of observable characteristics to infer income levels. However, since taxation is necessary to fund programs, redistribution becomes less effective, especially for programs other than means testing. The paper concludes by discussing the implications of these results for the design of more efficient targeting programs.

Long-Term Care in Latin America and the Caribbean with Pablo Ibarrarán and Sebastián Galiani, Economía 20.1 (2019): 1-32

Abstract.  This paper discusses theoretical and practical issues related to long-term care (LTC) services in Latin America. Demand for these services will rise as the region undergoes a swift demographic transition from its currently young population to a rapidly aging one, especially since the region's aging cohorts are more prone to experience a decline in their functional and physical abilities than elderly people elsewhere in the world. We argue that private insurance markets are ill-equipped to provide coverage to meet the need for LTC, while the amount of personal savings required to afford self-insurance would be prohibitively high. In Latin America, LTC may not be an immediate priority, but governments are likely to encourage the development of LTC programs as demand for them steadily grows. In particular, policymakers are probably going to focus initially on LTC programs for the poor and vulnerable, for whom affordability of LTC is a greater problem. We therefore study how basic elements of policy design affect the cost-effectiveness of LTC programs by means of a formal model. In a simple context where families can provide care themselves or hire care in a market, we find that pro-poor programs are more cost-effective when families have the option to receive cash subsidies, as the opportunity cost of providing care is lower for poor families. Moreover, the availability of in-kind and cash choices reduces program costs overall by screening families based on their opportunity cost of providing care.