Research

Research interests: Macroeconomics, Macro-Labor, Development Economics, Gender Economics, Fiscal Policy, Monetary Policy.

Publications

Sentimental Business Cycles with Evi Pappa and Morten Ravn, Review of Economic Studies, 2022.
with Online Appendix and Dataset on Mass Shootings in the United States, 1965-2019.

We estimate the dynamic causal effects of consumer sentiment shocks in the US. We identify autonomous changes in survey evidence on consumer confidence using fatalities in mass shootings as an instrument. We find the instrument to be significant for an aggregate index of consumer expectations and also back up the identification scheme with micro evidence that exploits the geographical variation in mass shootings. Sentiment shocks have real macroeconomic effects. A negative sentiment shock is recessionary: It sets off a persistent decline in consumer confidence and induces a contraction in industrial production, private sector consumption, and in the labor market, while having less evident nominal effects. Finally, sentiment shocks explain a non-negligible part of the cyclical fluctuations in consumer confidence and real macroeconomic aggregates.

Smart Containment: Lessons from Countries with Past Experience with Alexandra Fotiou, CEPR Covid Economics, 2021.

Following the Great Lockdown in 2020, it is important to take stock of lessons learned. How effective have different containment measures been in slowing the spread of Covid-19? Have containment measures been costly in terms of economic growth, fiscal balances, and accumulated debt? This paper finds that countries with previous SARS experience acted fast and "smart" and were able to contain the virus by relying mainly on public health measures —testing, contact tracing, and public information campaigns— rather than stay-at-home requirements. Using past coronavirus outbreaks as an instrumental variable, we show that countries with past experience were able to contain the virus in a smart way, reducing transmission and deaths while also experiencing higher economic growth in 2020.

Does Economic Security Really Impact on Gun Violence at U.S. Schools? with Evi Pappa and Morten Ravn, Nature Human Behaviour, 2019.
Supplementary Information can be found here along with table replication files here.

We challenge Pah et al’s (2017) claim that unemployment (and economic insecurity more generally) causes US school shootings. We show that the apparent relationship between school shootings and unemployment derives from lack of control for contagion of mass shootings; once such contagious effects are taken into account, there is no evidence that unemployment predicts the number of US school shootings.

Do labor market institutions matter for business cycles? with Stefano Gnocchi and Evi Pappa, Journal of Economic Dynamics and Control, 2015.

Using panel data of 19 OECD countries observed over 40 years and data on specific labor market reform episodes we conclude that labor market institutions matter for business cycle fluctuations. Spearman partial rank correlations reveal that more flexible institutions are associated with lower business cycle volatility. Turning to the analysis of reform episodes, wage bargaining reforms increase the correlation of the real wage with labor productivity and the volatility of unemployment. Employment protection reforms increase the volatility of employment and decrease the correlation of the real wage with labor productivity. Reforms reducing replacement rates make labor productivity more procyclical.

Can sustainable poverty reduction be achieved with little or no economic growth? The case of Jamaica, with Denis Medvedev, Zafer Mustafaoglu and Michiel Paris, Review of Economics and Institutions, 2013.

Can poverty decline with little growth in real GDP? This paper examines the case of Jamaica, where the poverty headcount halved between 2003 and 2007 despite real per capita GDP growth of just 1.1 percent per year, by analyzing the factors contributing to the observed reduction in poverty using household and labor force surveys. It sets out by providing a sectoral, demographic, and spatial picture of the evolution of poverty and finds that poverty reduction has been broad based, benefitting both rural and urban areas. Nearly three quarters of the poverty reduction is attributed to growth in average household consumption, which outpaced GDP growth due to large remittance inflows, and one quarter to narrowing inequality. In turn, around half of the reduction of inequality is explained by narrowing returns to education and declining sectoral wage gaps.

Current Research

Confidence and Local Activity: An IV Approach (Job Market Paper)

This paper provides new empirical evidence that “animal spirit” sentiment shocks have real effects that are short-lived. It studies the economic impact of changes in sentiment using individual level monthly data on confidence regarding U.S. output growth spanning 2000-2017. Overcoming the problem that most variations in confidence are endogenous to the economic cycle, I exploit that school shootings constitute a natural experiment to study the effect of exogenous movements in confidence that are orthogonal to fundamentals of the economy. School shootings generate significant drops in consumer confidence for residents in the county of the shooting. Such exogenous drops in sentiment are found to reduce consumer buying attitude for durable goods. At the aggregate county level, negative sentiment shocks are found to raise unemployment rates, but effects are short-lived lasting less than one year. Using an instrument for confidence is important to deal with measurement error and endogeneity; without taking this into account sentiment shocks effects on buying attitudes extend to larger items (cars and houses) and effects on unemployment are long-lasting up to three years.

Do labor market institutions matter for fertility? (joint with Andrea Camilli)

Using annual data for 20 OECD countries over the period 1961-2014, we study whether labor market institutions (LMIs) not targeted to maternity impact the total fertility rate (TFR). We distinguish between employment rigidities (ER) and real wage rigidities (RWR), since the former reduces and the latter amplifies the response of the business cycle to shocks. Panel regressions and principal component analysis reveal that ER, such as employment protection and union strength, increase TFR. On the other hand, RWR, proxied by the centralization of wage bargaining and unemployment benefits, reduce TFR. We also find evidence that unemployment volatility reduces fertility whereas wage volatility raises fertility. Thus, to the extent that labor market institutions affect unemployment and wage volatility, they may also affect fertility. We complement our analysis with a DSGE model that incorporates households' fertility decision as well as unemployment and wage rigidities. We find that downward wage rigidities amplify real contractions in response to negative demand shocks and lead to large drops in employment and fertility.

Do stock market booms anticipate baby booms?

This paper studies the procyclical nature of fertility in the U.S. employing a VAR and DSGE perspective. I find that fertility responds positively to: (i) current economic conditions - TFP shocks and (negative) unemployment shocks, as well as to (ii) expectations about future economic conditions - consumer confidence expectations and stock price news shocks. I complement these results with a DSGE model that incorporates fertility into a simple RBC model. Fertility is irriversible, children provide households with utility, and are associated with costs of two types: consumption - entering the budget constraint, and time - away from leisure and work. The model proposes two channels causing fertility to be procyclical. First, fertility turns out to be procyclical when the consumption cost of children is high, but becomes countercyclical when their cost is low. Second, I aim to extend this model by introducing credit frictions and analyzing a role for policy in attaining optimally countercyclical fertility, in the spirit of the education literature. If agents had access to perfect credit markets they would choose to forgo working during recessions when childbearing costs are lower (substitution effects would dominate income effects) but under credit constraints childbearing becomes procyclical.

Missing inflation in the Eurozone: shocks or structural changes? (joint with Johan Grip, Benedikt Kolb and Carlos Montes-Galdón)

Inflation in the euro area has been far below the ECB’s target since 2013. This paper investigates the relative contributions of economic shocks and structural changes in explaining these inflation dynamics. To this end, we estimate an open-economy New Keynesian DSGE model at 2nd order employing the estimation method of Kollmann (2015), which is a recent improvement over the increasingly popular particle filter for nonlinear models. The model economy has search and matching on the labour market and asymmetric adjustment costs for investment, wages and employment as in Abbritti and Fahr (2013), an open-economy setting with incomplete pass-through of foreign prices as in Justiniano and Preston (2010), and frictions and shocks similar to Smets and Wouters (2007). We allow for time-varying parameters that can be mapped into labor and product market reforms in the Eurozone.

Estimating an equilibrium exchange rate for the Argentine Peso with Andrea Coppola and Zafer Mustafaoglu, World Bank Policy Research Working Paper, 2016.

This paper assesses the equilibrium value of the Argentine peso exchange rate based on the country’s economic fundamentals and compares it with the official exchange rate value. The paper estimates a behavioral equilibrium exchange rate model that allows for movements in the equilibrium real effective exchange rate based on changing economic fundamentals, using monthly data from 1980 to 2015. The analysis identifies four key fundamentals driving the equilibrium exchange rate in Argentina: terms of trade, productivity differentials, foreign currency reserves, and trade openness. Based on these fundamentals, before the exchange rate reunification that took place at the end of 2015, the Argentine peso was overvalued by 39 percent. The results are robust to alternative estimation approaches.

TFP shocks and disaggregated capital flows: revisiting the "allocation puzzle"

Empirical evidence on capital flows suggests an “allocation puzzle" whereby net capital flows to low TFP growth countries, contradicting standard theoretical predictions. This paper re-examines this puzzle by looking at disaggregated gross capital flows – inflows and outflows of its subcomponents – foreign direct investment (FDI), portfolio investment (PI), debt, and reserves. It answers the question of how positive TFP shocks and stock price news shocks affect gross disaggregated capital flows across countries. It employs two methodologies: (i) panel regressions using newly available data on TFP for 105 countries spanning 1970-2011, and (ii) a panel VAR framework for a subset of non-OECD countries using quarterly data. By using the latter, we allow for dynamic interdependencies across variables and overcome dimensionality issues associated with estimating single-country VARs. Preliminary results from panel regressions yield that TFP growth is positively related to net capital flows, and subcomponents for net FDI and PI inflows, but relates negatively to net debt inflows (increased debt outflows dominate inflows).