Macroeconomics of Sticky Prices with Generalized Hazard Functions (with Fernando Alvarez and Francesco Lippi)
The Quarterly Journal of Economics, 137 (2), pp. 989–1038, May 2022
We give a full analytic characterization of a large class of sticky-price models where the firm's price setting behavior is described by a generalized hazard function. Such a function allows for a vast variety of empirical hazards to be fitted. This setup is microfounded by random menu costs as in Caballero and Engel (1993) or, alternatively, by information frictions as in Woodford (2009). We establish two main results. First, we show how to identify all the primitives of the model, including the distribution of the fundamental adjustment costs and the implied generalized hazard function, using the distribution of price changes. Second, we derive a sufficient statistic for the aggregate effect of a monetary shock: given an arbitrary generalized hazard function, the cumulative impulse response of output to a once-and-for-all monetary shock is proportional to the ratio of the kurtosis of the steady-state distribution of price changes over the frequency of price adjustment. We prove that Calvo's model yields the upper bound and Golosov and Lucas's model the lower bound on this measure within the class of random menu cost models.
Exchange Rate Policy and Heterogeneity in Small Open Economies
Journal of International Economics, 142, May 2023
This paper studies the role of exchange rate regimes in shaping the distributional effects of external monetary shocks. I model a small open economy where agents differ in wealth and in exposure to international trade, producing either tradable or non-tradable goods. The central bank responds to a foreign interest rate hike by a monetary tightening to stabilize the exchange rate or lets the currency depreciate, keeping the interest rate low. I find that exchange rate flexibility distributes consumption gains to the poorer agents. The monetary tightening required to stabilize the currency disproportionately affects their disposable income through interest payments on loans and falling wages. Attempts to fix the exchange rate increase consumption inequality. Flexibility also benefits the non-tradable sector because conditions in this sector are more sensitive to domestic demand and sharply deteriorate when domestic interest rates rise.
Macroprudential Policy for Internal Financial Dollarization (with Marcos Sora)
R&R at Journal of International Economics
This paper studies macroprudential policy for dollarization of domestic financial flows. We model a small open economy with entrepreneurs and workers who can save and borrow in domestic currency and in dollars. Entrepreneurs face a borrowing limit denominated in domestic currency, which makes dollar debt on their balance sheets especially disruptive in times of exchange rate depreciation. Falling output causes additional depreciation, creating a debt-deflation spiral that provides a rationale for de-dollarization. On the other hand, much of this dollar debt constitutes savings of domestic workers and provides them with insurance against depreciation events. We characterize social marginal benefits and costs of de-dollarization under this trade-off. We find that social marginal costs are associated with a deterioration in risk-sharing and can be expressed in terms of the interest rate premium on the dollar assets. These costs are of second order around the allocation without intervention.
Currency Mismatch on Bank Balance Sheets and Exchange Rates (with Marcos Sora and Liza Sizova)
draft coming soon