Working Papers:
Productivity Spillovers, Markups and Production Networks in an International Business Cycle Model
(OLD VERSION "How do Terms of Trade affect Productivity? The Role of Monopolistic Output Markets")
Abstract
This paper presents a general equilibrium two-country RBC model featuring production networks,
imperfectly competitive good markets and incomplete financial markets. For plausible parameter values,
the quantitative model delivers a degree of commovement that is in the order of magnitude of
the actual commovement of the U.S. economy with the rest of the world. Importantly, the model also
exhibits endogenous productivity spillovers (i.e., cross-country commovement in productivity) that
are similar to those observed in the data. The model has important predictions for emerging market
economies. In particular, if foreign shocks are the dominant source of disturbance, then it generates
volatility in trend growth, excess consumption volatility and negatively correlated terms of trade and
productivity. Such patterns explain important anomalies in emerging markets data. Hence, through
the lens of the model, business cycles in emerging economies are most likely driven by foreign shocks.
"Efficiency under endogenous information choice," with Venky Venkateswaran.
Abstract
We study the efficiency of equilibrium in a business cycle model where monopolistically
competitive firms acquire costly information about aggregate fundamentals before making
pricing and input decisions. We show that market power reduces the private value of information
relative to its social value, causing too little investment in learning and inefficient cyclical
fluctuations. Importantly, this is true even in an environment where the ex-post response to
information is socially optimal. A leading example of this dichotomy between ex-post and
ex-ante efficiency is an environment where firms choose labor input under uncertainty about
aggregate productivity. When firms set nominal prices, on the other hand, their actions exhibit
a inefficiently high sensitivity to private signals. The combination of this inefficiency in information
use and market power makes the overall direction of the inefficiency in information
acquisition ambiguous. Finally, we show that the standard full information policy response to
market power-related distortions can reduce welfare under endogenous uncertainty. These results
hold for different types of shocks (real and nominal) and for a general class of information
acquisition technologies.
"Firing Costs and Labor Market Fluctuations: A Cross-Country Analysis," with Lee Ohanian, Andrea Raffo and Richard Rogerson
Abstract
We document large differences across OECD countries in fluctuations of the intensive
and extensive margin of labor supply over the business cycle. Countries with larger fluctuations
in employment relative to hours per worker tend to display larger fluctuations in
total hours worked. These facts appear to be related to policies that impede the dismissal
of workers. We then present a quantitative framework that features both margins of labor
supply as well as costs to the adjustment of employment. Cross-country differences in
dismissal costs can account for a large fraction of the patterns observed in the data.
Publications:
"Learning about monetary policy rules when the cost-channel matters," with Vicente Tuesta, November 2009, Journal of Economic Dynamics and Control.
Abstract
We study how monetary policy may affect determinacy and expectational stability (E-stability)
of rational expectations equilibrium when the cost channel of monetary policy matters. Focusing
on instrumental Taylor-type rules and optimal target rules, we show that standard policies
can induce indeterminacy and expectational instability when the cost channel is present. A
nai.ve application of the traditional Taylor principle could be misleading, and expectations based
reaction function under discretion does not always induce determinate and E-stable
equilibrium. This result contrasts with the .findings of Bullard and Mitra (2002) and Evans
and Honkapohja (2003) for the standard new Keynesian model. The ability of the central bank
to commit to an optimal policy is an antidote to these problems.
"Determinacy and Learnability of Monetary Policy Rules in Small Open Economies," with Vicente Tuesta, July 2008, Journal of Money, Credit and Banking.
Abstract
This paper evaluates under which conditions diff.erent Taylor-type rules lead to determinacy
and expectational stability (E-stability) of rational expectations equilibrium in a simple New
Keynesian small open economy model, developed by Gali and Monacelli (2005). In particular,
we extend Bullard and Mitra (2002) results of determinacy and E-stability in a closed economy
to this small open economy framework. Our results highlight an important link between the
Taylor principle and both determinacy and learnability of equilibrium in small open economies.
More importantly, the degree of openness coupled with the nature of the policy rule adopted
by the monetary authorities might change this link in important ways. A key .finding is that,
contrary to Bullard and Mitra, expectations-based rules that involve the consumer price in
flation and/or the nominal exchange rate limit the region of E-stability and the Taylor Principle
does not guarantee E-stability. We also show that some forms of managed exchange rate rules
can help to alleviate problems of both indeterminacy and expectational instability, yet these
rules might not be desirable since they can promote greater volatility in the economy.
Other publications:
"Peru's Great Depression: A Perfect Storm?," (in Spanish) with Ugo Panizza, 2016, Revista de Estudios Económicos, Banco Central de Reserva del Peru.
"A BVAR forecasting model for Peruvian Inflation." with Vicente Tuesta and Marco Vega, 2006, Money Affairs, CEMLA (Link downloads complete issue).
"Using additional information in estimating the output gap in Peru: a multivariate unobserved component approach," with Shirley Miller, 2004, Money Affairs, CEMLA. (Link downloads complete issue)
"Examining policy trade-offs using a large structural model," In Spanish, 2004, Revista de Estudios Económicos, Banco Central de Reserva del Peru.
Work in progress:
"Chicken Little Business Cycles," with Lee Ohanian and Christopher Phelan