Job Market Paper

When it rains, it pours": fiscal policy, credit constraints and business cycles in emerging and developed economies

Latest Version

Fiscal pro-cyclicality, meaning co-movement between government expenditure and macroeconomic fundamentals, is an important feature of business cycle dynamics for emerging and poor economies. I estimate a panel SVAR to investigate if fiscal policy leads to heightened volatility, reinforcing the cycle in emerging economies. The analysis also sheds light on the role of external financial constraints in shaping fiscal policy. My findings suggest that the response of emerging governments to output fluctuations is similar to that of developed governments. However, emerging governments curtail spending in response to increases in the sovereign borrowing rate, which forces their consumption expenditure to act more pro cyclically. While I find evidence of higher fiscal discretion in emerging economies, the government consumption multiplier is substantially smaller for this group. For this reason, fiscal policy is responsible for a lower share of business cycle volatility in emerging economies than in developed ones.

Working Papers

“Gravity: Explaining Air Passenger Traffic”

The paper estimates a structurally founded gravity model of international aviation passenger traffic. I exploit geographic variation in the population cultural make up at the US metropolitan statistical area (MSA) level to construct cultural proximity indices between US MSA-s and international locations serviced by airports. I use the indices to evaluate the hypothesis that cultural proximity between two areas "shortens" the geographic distance between them; in other words, the paper evaluates whether two equidistant points which are linked by common cultural ties are ceteris paribus more likely to be linked by aviation and conditional on a link, have higher passenger volume between them. In order to test this hypothesis, I control for the complex infrastructure on the supply side. To inform estimation, I construct a model, which features economies of density and shows how selection into servicing a route and the mode (direct or indirect flight) chosen by the airline is influenced by the airline productivity as well as its network structure. Preliminary results suggest that geographic distance and cultural proximity are important determinants of bilateral passenger flows.

“Optimal Fiscal and Monetary Policy in a Small Open Economy with Firm Entry”

The terms of trade externality is a feature of the standard New Open Macroeconomics model. The externality is due to the fact that a country has market power over its domestically produced differentiated goods, which allows it to manipulate the international price of its domestically produced basket by depressing the supply of these goods. The open economy literature has established that the terms of trade externality leads the optimal monetary policy prescription to deviate from price stability, which would be optimal in the standard closed economy counterpart. This finding has very limited policy relevance, however, because it leads to higher unemployment relative to price stability. I show that in a two-sector open economy the terms of trade externality can be used for meaningful cross-sector labor reallocation. In particular, in a small open economy with product creation, a social planner tilts the terms of trade in her favor so as to allocate more labor towards the variety creation sector.