Terms of trade and unemployment in the business cycle (job market paper) - Draft
The standard notion regarding terms of trade is that when their movements deteriorate, small open economies are negatively affected in their real GDP. In this paper, I document that the business cycles correlation between terms of trade and real GDP vary widely between positive and negative values across countries even if separated by income groups. This raises the question, why do countries react differently towards terms of trade innovations? I show evidence that how countries react towards terms of trade movements is tightly linked to their labor market. I build a real business cycles model with a small open economy experiencing terms of trade uncertainty and a real wage rigidity. I find that a real wage rigidity is not only able to account a negative correlation between terms of trade and real GDP innovations, but also a positive one.
This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary autonomy, lenders anticipate that the government will face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. By contrast, a government with monetary autonomy can stabilize the economy and can easily remain immune to a rollover crisis. In a quantitative application, we find that the lack of monetary autonomy played a central role in making the Eurozone vulnerable to a rollover crisis. A lender of last resort can help ease the costs from giving up monetary independence.
Automation, education, and labor income inequality (with Andrea Pescatori) - Draft Coming Soon - Slides
The US has experienced a steep increase in labor income inequality in the last decades. Among many reasons for this, automation is known to be a main driver by increasing the wage gap between high-skill and low-skill workers. In addition to this, college education costs have also soared in the last decades, making it difficult to become a high-skill worker. We propose an endogenous skill choice life-cycle model to study how automation and the increase in higher education costs affect labor income inequality. We find that higher education costs amplify labor income inequality induced by automation. We then conduct a counterfactual experiment where we fix college education costs. We find that labor income inequality would have increased by just a third of what data shows in the US.
Sovereign spread movements in emerging economics: terms of trade matter (with Sora Lee) - Draft
We propose a stochastic general equilibrium model of sovereign default with endogenous default risk in order to explain the interest rate behavior in emerging economies. We incorporate two types of shocks to cover a foreign and a domestic uncertainty. We define as the domestic and the foreign uncertainty, GDP and terms of trade shock, respectively. The model is able to successful increase the dispersion of sovereign interest rates when GDP shocks are above the trend. This result seems to suggest that terms of trade is a good candidate to explain the volatility of interest rates in small open economies when they are not under recessions or crises.