Working Papers
2018
(Published, International Economics Volume 156, December 2018, Pages 45-60)
Business cycles are significantly more volatile in emerging economies than in developed ones, as has been extensively documented in the macroeconomic literature. There is also consensus that a substantial share of output volatility in emerging economies can be accounted for by domestic and idiosyncratic factors. As a result, the policy implications of these findings tend to predict that substantial welfare gains can be made from domestic policies that smooth business cycles. This paper argues the opposite view and asserts that there are no significant differences between emerging and developed economies in terms of the global and regional factors shaping macroeconomic fluctuations. Our results show that global factors account for 37%–48% of the de-trended output variance in emerging economies, substantially more than the 5%–15% range reported in the literature. By comparison, approximately half of output variance in developed economies is accounted for by global factors. We conclude that global and regional factors account for the bulk of output fluctuations in all economies, and that domestic factors are marginally more important in emerging economies than in developed ones. Therefore, cycle-smoothing domestic policies in emerging economies may not be as effective as the literature suggests.
Imperfect Governance and Price Stickiness in Emerging Economies
Imperfect governance exacerbates macroeconomic fluctuations in emerging economies. We use strategic interactions between public and private goods to link price stickiness and institutional failure. The government as a provider of public goods exhibits agency in its relationship with households, and that yields to welfare losses for the latter. The government also faces a sub-optimal Laffer curve because of its inability to extract taxes. Imperfect governance also has an impact on terms of trade, as it distorts domestic prices in comparison to those of imported goods.
The effects of migration and remittances on development and capital in Caribbean Small Island Developing States (with Lesly Cassin)
This paper puts forward a modified OLG framework for high migration countries such as Caribbean islands, to link economic growth and demographic features. Our theoretical model captures the potential effects of migration on the households' choices in terms of savings, fertility and education, and thus on the accumulation of human and physical capital. Through a numerical analysis we study specifically five countries. We find that households in Jamaica, Haiti and Dominican Republic invest more in education for future generations and increase their fertility rate. Thus due to migration, their economic growth is driven by accumulation of efficient units of labor. For Barbados or Trinidad and Tobago, the benefits from education are dwarfed respectively by a low migration premium or a low level of remittances. Their economic growth is therefore driven by a high accumulation of physical capital. Second, we introduce frictions on the capital market in order to account for the imperfections in the interest rate adjustments to the marginal productivity of capital. For the studied islands, physical capital accumulation on the one hand and economic growth on the other hand show trade-offs between short-run and long-run if the frictions are reduced.
A Steeper slope: the Laffer Tax Curve in Developing and Emerging Economies
In comparing the tax burden between developed and developing economies, we argue that the Laffer curve is sensitive to two factors, namely the size of underground economic activities and tax collection costs. The baseline model exhibits counter-intuitive results for developing and emerging economies. Insofar as we find that they are able to extract higher tax rates and revenues in comparison with developed countries. The differences are due to the values computed for structural parameters and steady-state variables. However, when the share of underground activities is taken into account, the Laffer curve is pushed downward, while tax collection costs shift the peak rate to the left.
2017
Microfoundations of the New Keynesian Phillips Curve in an Open Emerging Economy
In an open economy setting, the slope in the New Keynesian Phillips Curve (NKPC) becomes sensitive to openness to trade, particularly so in emerging economies. The literature tends to overlook the underlying issues of this aspect, a shortcoming which we seek to address in this paper. We argue that a new Keynesian model framework with real rigidities can remedy to this limitation. To the literature's use of a constant domestic bias parameter, we substitute the concept of imperfect access to consumption goods. Our model incorporates real rigidities in the New Keynesian framework through domestic firm-level investment schedule, which determines aggregate openness to trade. We argue that capital-intensive goods are more integrated in global trade. The proposed model in this paper formulates a micro-founded Phillips curve augmented with an openness to trade component, which captures its ambiguous effects on inflation: strategic complementarity between domestic and foreign goods increases price stickiness, whereas competitive foreign products drive aggregate prices down. Finally, the paper describes welfare changes following different monetary policy regimes in an open economy setting. The welfare results implied by the usual tradeoff facing monetary authorities between exchange rate and inflation stability becomes sensitive to openness to trade.
2016
Business cycles are significantly more volatile in emerging economies than in developed ones, as has been extensively documented in the macroeconomic literature. There is also consensus that a substantial share of output volatility in emerging economies can be accounted for by domestic and idiosyncratic factors. As a result, the policy implications of these findings tend to predict that substantial welfare gains can be made from domestic policies that smooth business cycles. This paper argues the opposite view and asserts that there are no significant differences between emerging and developed economies in terms of the global and regional factors shaping macroeconomic fluctuations. Our results show that global factors account for 37%–48% of the de-trended output variance in emerging economies, substantially more than the 5%–15% range reported in the literature. By comparison, approximately half of output variance in developed economies is accounted for by global factors. We conclude that global and regional factors account for the bulk of output fluctuations in all economies, and that domestic factors are marginally more important in emerging economies than in developed ones. Therefore, cycle-smoothing domestic policies in emerging economies may not be as effective as the literature suggests.