Research

Publications

Working Papers

    A prominent structural feature in many developing countries is the widespread prevalence of the informal economy, which usually operates as a form of insurance against downturns. Despite this knowledge, the effect of informality on inflation and output dynamics in developing countries remains little understood. This study asks to what extent monetary policy is stabilizing in economies with a large informal sector. First, through VAR analysis, we provide novel evidence of the counter-cyclical response of informal employment conditional on monetary policy shocks. Second, we examine the transmission mechanism of monetary policy through the lens of a two-sector New Keynesian (NK) model with endogenous firm entry to analyze the role of informality on sectoral reallocation, inflation, and output dynamics. For a plausible parametrization of the model, we quantitatively show that the presence of an informal sector implies a lower sacrifice ratio to monetary policy surprises, thereby enhancing the effectiveness of monetary policy.


    Recent literature has documented a prominent role for commodity price shocks in driving fluctuations in emerging markets (Dreschel and Tenreyro 2018, Fernandez et al. 2018.) Our study adds to this literature by considering the case of advanced commodity exporting economies, as well as asking how important are commodity shocks for understanding the high observed volatility of real exchange rates. Specifically, we carry out a quantitative examination of the well-known sources of business cycles in small open economies, with emphasis on commodity exporting countries. We estimate a standard open economy model with Bayesian methods for the cases of Mexico and Canada -two oil producing countries. We measure the relative contribution of both trend and transitory components of productivity, interest rate shocks, and commodity price shocks to the volatility of macroeconomic variables. We find that transitory shocks to productivity along with commodity price shocks explain a sizeable share of the volatility of macroeconomic aggregates as well as the real exchange rate. Our results are thus suggestive of the importance of commodity prices for the conduct of stabilization policy in these economies.


    This paper studies the transmission of commodity price shocks in economies with a large informal sector. First, I provide novel empirical evidence  that the informality rate increases in response to higher commodity prices. This new fact qualifies the commonly-held view that informal employment generally works as an insurance mechanism against shocks. Second, I develop a model of a small open commodity exporting economy with endogenous firm entry to analyze the transmission of commodity price shocks on sectoral (formal and informal) labor market and aggregate dynamics, as well as movements of the real exchange rate and capital flows. I find that the income effect resulting from commodity prices can be reconciled with the empirical facts when there is high substitutability across goods.

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