Research
Publications
"Domestic Barriers to Entry and External Vulnerability in Emerging Economies," with Leonardo Barreto, Minnesota Univerity, and Alan Finkelstein Shapiro, Tufts University, Journal of Economic Dynamics and Control, vol. 154, September 2023.
Emerging economies (EMEs) exhibit high regulatory costs of firm creation. At the same time, lower firm-creation costs are associated with greater financial development and use of formal credit, which can expose EME firms to external financial shocks that propagate to EMEs via the banking system such as those that EMEs experienced during the Global Financial Crisis. We present evidence showing that in response to an adverse shock to the US banking system, EMEs with low firm-creation costs exhibit smaller contractions and earlier recoveries in cross-border bank flows, domestic bank credit, and GDP compared to EMEs with high firm-creation costs. A two-country model with banking frictions, cross-border bank flows, and endogenous firm entry can successfully capture this evidence. Our findings suggest that greater domestic credit-market deepening via lower barriers to firm entry in EMEs need not be associated with greater macro and domestic credit-market volatility.
"Labor Market and Macroeconomic Dynamics in Latin America amid COVID: The Role of Digital-Adoption Policies" with Alan Finkelstein Shapiro, Tufts University, and Santiago Novoa, IDB, The World Bank Economic Review, 24 August 2023.
This paper analyzes how a policy that lowers firm digital-adoption costs shapes the labor-market and economic recovery from COVID-19 in Latin America (LA) using a framework with firm entry and unemployment, where salaried firms can adopt digital technologies and the employment and firm structure embodies key features of LA economies. Using Mexico as a case study, the model replicates the response of the labor market and output at the onset of the COVID recession and in its aftermath, including the dynamics of labor-force participation and informal employment. A policy-induced permanent reduction in the cost of adopting digital technologies at the trough of the recession bolsters the recovery of GDP, total employment, and labor income, and leads to a larger expansion in the share of formal employment compared to a no-policy scenario. In the long run, the economy exhibits a reduction in total employment but higher levels of GDP and labor income, greater average firm productivity, a larger formal employment share, and a marginally lower unemployment rate. Finally, as a side effect, the policy exacerbates the differential between formal and informal labor income, both as the economy recovers from the COVID recession and in the long run.
"Tight Money-Tight Credit: Tinbergen's Rule and Strategic Interaction in the Conduct of Monetary and Financial Policies," with Julio Carrillo, Bank of Mexico, Enrique Mendoza, University of Pennsylvania, and Jessica Roldán-Peña, Bank of Mexico, American Economic Journal: Macroeconomics, vo. 13, No.3, July 2021.
We study the quantitative implications of strategic interaction and Tinbergen's Rule for the analysis of monetary and financial policies in a New Keynesian model with financial frictions and "risk shocks.'' Tinbergen's Rule is relevant: Separate monetary and financial policies, with the latter taxing the opportunity cost of lenders more to encourage lending when credit markets tighten, produce higher social welfare than a one-policy setup adding spreads to the monetary policy rule. In fact, the latter yields a regime in which policy rule elasticities imply tighter policies (i.e. a tight money-tight credit regime). In the strategy space, reaction curves are nonlinear, reflecting shifts from strategic substitutes to complements in the best responses of policy-rule elasticities. Coordination is unnecessary when the two policies are set separately but each aiming to maximize welfare: The Nash equilibrium matches the first-best outcome of setting policies jointly with the same goal. If the goals differ, with each policy minimizing the variance of its targets and instruments, Cooperation dominates Nash. Both are inferior to the first best and again produce tight money-tight credit regimes. These findings favor separate but well-coordinated monetary and financial policies.
"Risky Banks and Macroprudential Policy for Emerging Economies," with Gabriel Cuadra, Bank of Mexico, Review of Economic Dynamics, vol.30, 125-144, October 2018.
We develop a two-country DSGE model with financial intermediaries to analyze the role of cross-border bank flows in the transmission of a U.S. bank's balance sheet shock to emerging market economies (EMEs). In the model, banks in both countries face an agency problem when borrowing from domestic households. EME banks might also be constrained in borrowing from U.S. banks, what we call risky EME banks. A negative quality of capital shock in the United States generates a global financial crisis. EME's macro-prudential policy that targets non-core liabilities (cross-border bank flows) makes the domestic economy resilient to the volatility of cross-border bank flows and makes EME's households better off.
"Mortgage Default in an Estimated Model of the U.S. Housing Market," with Luisa Lambertini, EPFL, and Pinar Uysal, Richmond Fed, Journal of Economic Dynamics and Control, 76, 171-201, March 2017.
This paper models the housing sector, mortgages, and endogenous default and loan to-value ratio as well as nominal and real rigidities in a DSGE setting. We use data for the period 1981-2006 to estimate our model using Bayesian techniques. We analyze how an increase in risk in the mortgage market raises the default rate and spreads to the rest of the economy, creating a recession. In our model two shocks are well suited to replicate the subprime crisis and the Great Recession: the mortgage risk shock and the housing demand shock. Next we use our estimated model to evaluate a policy that reduces the principal of underwater mortgages. This policy is successful in stabilizing the mortgage market and makes all agents better off.
"Financial Intermediation in a Global Environment," International Journal of Central Banking, 12(3), 291-344, September 2016.
I develop a two-country DSGE model with global banks (financial intermediaries in one country lend to banks in the other country). Banks are financially constrained on how much they can borrow from households. The main goal is to have a framework that captures the international transmission of a financial crisis through the balance sheet of the global banks and helps explaining the insurance mechanism of the international asset market. I use the model to study the global transmission of a country-specific quality of capital shock. Then, I look at how unconventional unilateral credit policies help to mitigate the effects of a financial disruption. The policies are carried out by the policy maker of the country directly hit by the shock. Consumers of that country are better off with policy than without it, while consumers from the other country are worse off.
Working Papers
"Climate Policies, Labor Markets, and Macroeconomic Outcomes in Emerging Economies" with Alan Finkelstein Shapiro, Tufts University-- Submitted
We study the labor market and macroeconomic effects of introducing a carbon tax in the energy sector in emerging economies (EMEs) by building a framework with equilibrium unemployment and firm entry that incorporates key elements of the distinct employment and firm structure of EMEs. Our model endogenizes the adoption of green energy-production technologies—a core element of policy discussions regarding the transition to a low-carbon economy. Calibrating the model to EME data, we show that a carbon tax fosters greater green technology adoption and increases the share of green energy produced. However, the tax leads to higher energy prices, which reduce salaried firm creation and formal employment and increase self-employment, labor participation, and unemployment. As a result, the tax generates output and welfare losses. Green technology adoption plays a central role in limiting the quantitative magnitude of these losses, while the response of self-employment is key to explaining the adverse labor market and macroeconomic effects of the policy. Given this finding, we show that a carbon tax coupled with a plausible reduction in the cost of becoming a formal firm can offset the adverse effects of the tax and generate a transition to a lower-carbon economy with minimal economic costs. Finally, we show that lowering green-technology adoption costs or the cost of green-energy production inputs—two alternative climate policies—reduces emissions while limiting the output and welfare costs compared to a carbon tax.
"Fintech Entry, Firm Financial Inclusion, and Macroeconomic Dynamics in Emerging Economies" with Alan Finkelstein Shapiro, Tufts University, and Federico Maldelman, Federal Reserve Bank of Atlanta -- Submitted
We build a model with a traditional banking system, endogenous entry of firms and Fintech intermediaries, and rm heterogeneity in credit access and usage to study the credit-market, macroeconomic, and business cycle implications of the recent sizable growth in the number of Fintech intermediaries in emerging economies. Our analysis delivers three findings. First, the impact of greater Fintech entry on firm financial inclusion depends on whether a greater entry is driven by lower entry costs for Fintech intermediaries or lower barriers to Fintech credit for unbanked firms. Second, greater Fintech entry can have positive long-term macroeconomic effects. Third, greater Fintec entry leads to a reduction in output volatility, but results in greater relative volatility in bank credit and consumption. The effects of Fintech entry on macro outcomes and volatility hinge critically on the interaction between domestic financial shocks and the reduction in Fintech lending rates stemming from greater Fintech entry. Unless greater Fintech entry leads to lower Fintech credit costs for firms, greater Fintech entry will have no meaningful credit-market or business cycle consequences.
"Fuel-Price Shocks and Inflation in Latin America and the Caribbean" with Arturo Galindo, Inter-American Development Bank
We estimate the impact of fuel-commodity price shocks on inflation and inflation expectations for eight Latin American countries in which monetary policy follows inflation-targeting frameworks. We use Bayesian Vector Autoregressive models (BVARs) and data from 2005 and up to 2022 to quantify these impacts. We find that the fuel-price shocks are significant in all cases and the response ranges between 0.01 and 0.04 percentage points of inflation, following a 1 p.p. shock to fuel prices. A variance decomposition exercise shows that more than 50% of the outburst in inflation that these countries experienced in 2021 and 2022 can be attributed to the shock in global fuel prices. These results are robust to changes in the specification that include additional controls, different commodity price measures, different lag structures, and alternative ordering.
"Price Dynamics and the Financing Structure of Firms in Emerging Economies," with Alan Finkelstein Shapiro, Tufts University, and Diego Vera-Cossio, IDB -- WP available
We use a novel dataset that merges goods-level prices underlying the CPI in Mexico with the balance sheet information of Mexican publicly listed firms and study the connection between firms' financing structure and price dynamics in an emerging economy. First, we find that larger firms (in terms of sales and employees) tend to use more interfirm trade credit relative to bank credit. Second, these firms use interfirm trade credit as a mechanism to smooth variations in their prices. Third, all else equal, firms with a higher trade-to-bank credit ratio tend to lower prices. In turn, the behavior of these firms explains the negative relationship between aggregate trade credit growth and inflation in the data. A tractable New Keynesian model with search frictions in physical input markets sheds light on firms' structural characteristics as well as the economic mechanisms that rationalize our empirical findings.
"Capital Flow Management Measures and Dollarization," with Eugenia Andreasen, University of Chile, WP available
This paper studies from an empirical and theoretical perspective the systemic and bank-level effects of imposing reserve requirements (RR) in foreign currency in an economy with a heavily dollarized financial system. We empirically characterize the banks' responses to the RR carried out by the Peruvian Central Bank since 2008 with the objective of stabilizing the financial market and meeting its policy targets. Our results suggest that the RR is effective in reducing the overall level of credit in the economy and that banks' response in terms of credit and deposits are very heterogeneous depending on the banks' ex-ante preference for foreign funding ratio, i.e. the ratio of deposits in dollars to total loans. Motivated by the empirical insights, we build a DSGE small-open-economy model with financial frictions à la Gertler-Karadi-Kiyotaki, where we introduce bank heterogeneity and financial dollarization, to evaluate the effectiveness of the differential RR in reducing financial dollarization and improving financial resilience.
"Monetary Policy Announcements and Expectations: The Case of Mexico," with Ana María Aguilar, BIS, Carlo Alcaraz, Bank of Mexico, and Jessica Roldán-Peña, Finamex Casa de Bolsa, WP available
In this paper we study the effects of Mexico's Central Bank monetary policy decisions on the expectations of private forecasters. In particular, we analyze the inflation and monetary policy rate expectations. We estimate a fixed-effect model at analyst level using a panel of professional forecasters from 2010 to 2017. We study the differences in expectations before and after a monetary policy announcement and we compare it when there are no announcements. We find that professional forecasters "listen" to the central bank, i.e. the changes in their short-run expectations are different when there are monetary policy announcements. Also, we find that analysts' surprises in realized inflation affect short-term inflation expectations but do not affect long-term inflation expectations suggesting anchored inflation expectations. Finally, we find that the nominal exchange rate plays an important role in determining both short-term inflation expectations and reference rate expectations. Additionally, monetary policy surprises have an impact on end-of-the-year inflation expectations and reference rate expectations.
"Fed's interest rate normalization: Does it matter who borrows from abroad in EME?"
We build a small open economy model with banks and exporting firms. An increase in the foreign interest rate makes borrowing more expensive and brings the economy into a recession. When natural non-hedged firms borrow from abroad, an increase in the foreign interest rate prompts more volatility in the emerging economy than when natural hedged firms borrow from abroad. We propose a non-conventional policy in which the financial authority lends to non-hedged firms when foreign borrowing is more expensive. Households are better-off with the policy than without it.
Work in Progress
"Migration, Remittances, and their Macroeconomic Effects" with Alan Finkelstein Shapiro and Andrés González Gómez
Discussions at Conferences
For all three papers: "The Effect of U.S. Stress Tests on Monetary Policy Spillovers to EMEs" by Liu, Niepmann and Schmidt-Eisenlohr, "Monetary Policy and Macroprudential Policy Interactions: the case of Mexico" by Bush, Lopez and Lopez Gallo, and "International and Domestic Interactions of Macroprudential and Monetary Policies: the case of Chile" by Gomez, Jara and Moreno -- December 2019
"From Carry Trades to Trade Credit: Financial Intermediation by Non-Financial Corporation" by Bryan Hardy and Felipe Saffie -- July 2019
"Taking the Fed at its Word: Direct Estimation of Central Bank Objectives using Text Analytics" by Shapiro and Wilson -- May 2019
"Financial Stability, Growth and Macroprudential Policy" by Chang Ma -- January 2019
"Can Macroprudential Measures make Cross-Border Lending more Resilient?" by Takáts and Temesvary -- August 2018
"Macroprudential Policy in Presence of External Risks" by Ricardo Reyes-Heroles and Gabriel Tenorio -- March 2018
"Fiscal Origins of Monetary Paradoxes'' by Caramp and Silva -- March 2018
"De-leveraging or de-risking? How banks cope with loss" by Bidder, Krainer, and Shapiro -- July 2017
"Financial Vulnerability and Monetary Policy" by Tobias Adrian and Fernando Duarte -- July 2017
"Bank-Specific Shocks and House Price Growth in the United States" by Bremus, Krause and Noth -- June 2017
"Asset Encumbrance, Bank Funding, and Covered Bonds" by Toni Ahnert, Kartik Anand, Prasanna Gai, and James Chapman -- June 2015
"Financial Shocks, Loan Loss Provisions and Macroeconomic Stability" by Roy Zilberman and William J. Taylor -- March 2015
"Business Cycles in Emerging Markets: the Role of Liability Dollarization and Valuation Effects" by Stefan Nots and Peter Rossenkranz -- March 2013