Job Market Paper
Abstract: Primary commodity exporter countries face large terms of trade fluctuations, largely driven by primary commodity price shocks and amplified by the relative importance of primary commodities in the countries' exports. An increase in the price of a primary commodity is usually followed by a decrease in terms of trade, defined as the relative price of imports over exports, and an increase in real GDP in these countries. Meanwhile, countries that do not export primary commodities enjoy more stable terms of trade, and their real GDP is positively correlated with terms of trade. Although the literature on primary commodity exporters has focused on developing countries, I show that this relation is independent of a country's income level. Since standard models are unable to generate real aggregate fluctuations from price shocks if real GDP is correctly measured, this paper identifies a puzzle. Finally, it proposes a class of mechanisms that is capable of explaining the heterogeneous impact of terms of trade fluctuations across countries. I show that a possible resolution is to incorporate the presence of idle resources and a production cost externality in the primary commodity producing sector in order to connect terms of trade fluctuations to real GDP fluctuations. When subjected to a primary commodity price shock, the model successfully accounts for the behavior of terms of trade and its relation to real GDP for different export compositions.
Presented at: the 16th Society for the Advancement of Economic Theory (SAET) Conference in Rio de Janeiro, Brazil.
Work in Progress
Macroeconomic Effects of Medicare, with Juan Carlos Conesa, Parisa Kamali, Timothy Kehoe, Vegard Nygaard, Gajen Raveendranathan, and Akshar Saxena.
Abstract: Medicare is one of the largest health insurance programs in the world, currently providing health insurance to about 50 million Americans and comprising 14.4 percent of federal outlays, or 2.9 percent of GDP. Despite its prevalent role, little is known about its implications for welfare and macroeconomic aggregates. This paper aims to improve our understanding of the role of Medicare in the macroeconomy. To do this, we first develop a general equilibrium overlapping generations model with incomplete markets and heterogeneous agents where households differ in age, education, health status, labor productivity, assets, and health insurance status. We use the model to quantify the macroeconomic effects of an unexpected elimination of Medicare. The paper first shows that a simple comparison of steady states is insufficient to evaluate the welfare effects of reforms since it abstracts from potentially large transitioning costs. In particular, we find significantly lower welfare gains to an unborn agent under the veil of ignorance from eliminating Medicare when the costs of transition is taken into account. We then turn attention to the effects on the current cohorts, and find that eliminating Medicare reduces welfare. The policy reform leads to a slight increase in welfare for young agents. However, this effect is negligible compared to the negative welfare effects on the elderly. Next, we find that more old households qualify for Medicaid in the economy without Medicare. As a result, the elderly respond to the policy reform by substituting Medicare for Medicaid, which in turn raises government spending on the latter program. Public spending on Social Security and food stamps also increase following the elimination of Medicare. As a result of these offsetting expenses, we find that the government only saves about 50 cents for every dollar it cuts on Medicare expenses.
The Stages of Growth Revisited, Part 1: A General Framework and Taking Off into Growth, with Timothy Kehoe and Gajen Raveendranathan.
The Stages of Growth Revisited, Part 2: Catching Up to and Joining the Economic Leader, with Timothy Kehoe and Gajen Raveendranathan.
Abstract: Rostow (1960) hypothesized that taking off into economic growth was a difficult task for countries in the 19th century, requiring major changes in institutions. In the 20th century, however, as the United States and other advanced countries became richer because of improvements in technologies and managerial practices, it became easier for poor countries to take off into rapid growth by adopting some of these improvements. We hypothesize that, while taking off is now easier, the difficult transition is now from take-off to catch-up, where nations grow closer to the economic leader (now the United States). Doing so often requires major reforms in policies and institutions. Data suggest that when countries reach the limits imposed by their policies and institutions, their growth slows sharply. Even countries like Japan that have joined the United States in economics leadership in defining best practice in some sectors lag behind in other sectors. Our theory suggests that China is currently reaching its limits to rapid growth.