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                  Julio Andres Blanco                        

          
Assistant Professor of Economics, University of Michigan Department of Economics 
Office: Lorch Hall 365B
611 Tappan Street, Ann Arbor, MI 48109, USA


    

Working Papers

 1- 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 bound on interest rates. 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 resource 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 bound implications differ because the endogenous price flexibility decreases with the inflation target.
2- Menu Costs, Uncertainty Cycles, and the Propagation of Nominal Shocks* (with Isaac Baley)   
Firms operate in constantly changing and uncertain environments. We argue that firm uncertainty is a key determinant of pricing decisions, and that it affects the propagation of nominal shocks in the economy. For this purpose, we develop a price-setting model with menu costs and imperfect information about idiosyncratic productivity. Uncertainty arises from firms' inability to distinguish between permanent and transitory productivity changes. Upon the arrival of a productivity shock, a firm's uncertainty spikes up and then fades in light of new information until the next shock arrives. These uncertainty cycles, when paired with menu costs, generate endogenous price flexibility that correlates positively with uncertainty. When heterogeneity in firm uncertainty is disciplined with micro-price statistics, aggregate nominal shocks have very persistent effects on output. However, if nominal shocks are accompanied by an increase in the average level of uncertainty, their output effects are reduced.  

3The Unemployment Accelerator (with Gaston Navarro) 
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: search frictions 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 show the model matches firm-level statistics as well as business cycle fluctuations in labor and financial markets. We provide compelling micro-evidence of the  unemployment accelerator: a 10\% increase in a firm's number of workers is associated with a 4\% increase in its market value and a 6\% decline in its probability of default. We show that our model can account for these facts, and that the two key assumptions we make are essential for this.
4- Price Rigidities and the Relative PPP (with Javier Cravino)
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 microdata for the UK, Austria and Mexico. Relative reset prices account for almost all of the real exchange rate movements in the data. This is at odds with the predictions of Sticky Price Open Economy models, which generate volatile and persistent real exchange rates but not through movements in relative reset prices.