Julio Leal - research information

Research Economist, Banco de México.
Contact: jleal @ banxico DOT org DOT mx

Research Papers

World Bank Economic Review (2016)
News! This paper is forthcoming in the World Bank Economic Review (WBER)!

Abstract. In this short paper, I seek to sharpen the understanding of the economic channels through which sector-specific distortions affect aggregate outcomes. I pay special attention on how cross-sector misallocation might arrive as a result of these distortions, and clarify how models of resource misallocation across heterogeneous firms differ from models of resource misallocation across sectors. I present facts that suggest the presence of such distortions in Mexico, a noteworthy developing country. The paper highlights the importance of understanding the origin and nature of sector-specific distortions for policy design.

Banco de México Working Papers, N° 2014-26, December 2014.
News! This paper is forthcoming in the Review of Income and Wealth (ROIW)!

Abstract. How is the size of the informal sector affected when the distribution of social expenditures across formal and informal workers changes? Given this distribution, how is it affected when the generosity of these transfers changes? We use a search frictions model with informality, (ex post) heterogeneous workers, and conditional taxes and transfers. In the model, formal jobs are "better" than informal jobs, but harder to get. Taxes are proportional to the wage, while transfers are lump sum, implying a cross-subsidy from high-income to low-income workers. As a result, the marginal worker weighs two opposing forces: changes in taxes vs. changes in transfers. We calibrate the model to Mexico and perform counterfactuals. We find that informality is quite inelastic due to frictions, and due to the opposing forces of taxes and transfers.

Banco de México Working Papers, Nº 2015-23, November 2015.
News! Revise and Resubmit for the Review of Economic Dynamics (RED)!

Abstract. For a typical developing country, this paper shows that once inter-sectoral linkages are taken into account, closing the productivity gap in a number of services gives bigger gains in aggregate productivity than closing it in agriculture or in manufacturing, despite their larger gaps. This is performed in the context of an input-output economy and general equilibrium. Also, the importance of sector-specific distortions that produce cross-sector misallocation is addressed. I compute the effect of the removal of these distortions on aggregate productivity using the input-output model and find that this could increase productivity up to 68%, depending on whether the rents from distortions stay in the economy or not. 

Other versions: ABCDE conference 

Oldest version presented in LACEA-LAMES 2013

Working Paper, August 2015. Submitted for publication.

Abstract. I show the conditions under which an input-output economy is equivalent to a value-added economy. In particular, I show that the “degree of influence” of a given sector is equal to its value added share under a plausible specification of the technology. The value added of a given sector is used to support final consumption across sectors, and the way this value reaches other sectors is through the input- output network. The Leontief multiplier is still present, but the equivalence result emphasizes the importance of keeping track of what gets multiplied as a response to changes in exogenous parameters. 

This is Paper 1 in a set of two inter-dependent papers on input-output economies and aggregate outcomes. The companion paper of this set, Paper 2, is entitled “Key sectors in economic development: a perspective on input-output linkages and cross-sector misallocation.”

Published as chapter 4 in "Contemporary topics in macroeconomics". El Colegio de México (2014). ISBN 978-607-462-637-7.

Abstract . I review a contemporary branch of the informal sector literature that focus on understanding the way firm behavior is affected by the presence of informality and how such distortions have an impact on aggregate variables. The authors in this group all make use of dynamic general equilibrium (DGE) models. I focus on models with heterogeneous firms and a cost of informality that is increasing with firm size: reducing informality entails a tradeoff because there are some distortions associated with the formal sector and some others with the informal. Quantitative evaluations of this tradeoff using these models show that, in general, reducing informality brings gains. In conclusion, substantial progress has been made in understanding informality and its consequences through the use of DGE models with heterogeneous firms. More research is needed to understand how informality affects the economy when other sources of heterogeneity are considered.

 Review of Economic Dynamics, Volume 17, Issue 2, April 2014, Pages 262–286.

Abstract. An important determinant of informality in a country is its tax enforcement capacity, which some authors argue further distorts the decisions of firms and creates inefficiency. In this paper, I assess the quantitative effect of incomplete tax enforcement on aggregate output and productivity using a dynamic general equilibrium framework. I calibrate the model using data for Mexico, where the informal sector is large. I then investigate the effects of improving enforcement. I find that under complete enforcement, Mexico's labor productivity and output would be 19% higher under perfect competition and 34% higher under monopolistic competition. The source of this gain is the removal of the distortions induced by incomplete enforcement of taxes. These distortions affect the economy in three ways: by reducing the capital–labor ratios of informal establishments; by allowing low-productive entrepreneurs to enter; and by misallocating resources towards low-productive establishments...

IDB Working Paper Series No. IDB-WP-429.

Abstract. This paper analyzes the aggregate effects of a revenue neutral fiscal-cumsocial policy reform in a typical developing country that consists of two main changes: (1) the implementation of universal social insurance to replace the current dual social protection system (i.e., a reconfiguration of transfers); and (2) the elimination of the current social security payroll tax to replace it with a generalized VAT (i.e., a reconfiguration of taxes). The authors find that this reform increases productivity by 2 percent and output by 3 percent as it improves the allocation of resources across firms and sectors, and generates a substantial change in occupational choices that favors wage earners. As a result, wages (before transfers) increase for all employees. Also, due to the reconfiguration of transfers, earnings (wages after transfers) for informal employees increase relative to the earnings of formal employees, which decreases inequality. However, we also find that the reform could affect some groups in the population, given the regressive nature of VAT and heterogeneity in the valuation of transfers across workers.

Books and Chapters

El Colegio de México (2014). ISBN 978-607-462-637-7.

Reflections on modern macroeconomics (with Stephen McKnight)
Published as chapter 1 in "Contemporary topics in macroeconomics". El Colegio de México (2014). ISBN 978-607-462-637-7.

Published as chapter 4 in "Contemporary topics in macroeconomics". El Colegio de México (2014). ISBN 978-607-462-637-7.

Research in Progress

  • The informal sector, and structural transformation, with Berthold Herrendorf and Akos Valentinyi
  • Economic fluctuations and the fear of taxes
  • Worker's flows across formal and informal jobs, with Richard Rogerson
  • Informality and fluctuations, with Bernabé López Martín, and Julio Carrillo

Julio Leal
Research Information