WORK IN PROGRESS:
- "Structural Identification of Production Functions under Financial Frictions,'' with Matías Tapia and Lucciano Villacorta.
Abstract: Production-function elasticities and the productivity process are central primitives in the quantitative macroeconomic models used to study capital misallocation and the aggregate consequences of financial frictions. We show that the standard proxy-variable methods developed in industrial organization to recover these primitives from microdata mistake heterogeneity in financial conditions for heterogeneity in productivity, leading to sizable biases: the labor elasticity is inflated, the capital elasticity is deflated, and both the persistence and the dispersion of measured productivity are compressed. In Chilean administrative microdata, conventional Olley--Pakes overstates the labor elasticity by 40\%, understates the capital elasticity by 23%, delivers apparent constant returns to scale instead of a span of control near 0.91, and compresses the measured persistence and dispersion of the productivity process by up to 60\%. We propose two alternative estimators that restore identification under financial frictions: an augmented Olley--Pakes that conditions the proxy on net worth, and a wealth proxy that inverts the wealth-accumulation policy through the self-financing channel.
- "Fiscal Austerity in Heterogeneous-Agent Economies: Macroeconomic Effects and Political Support."
Abstract: I study the economic and political determinants of fiscal austerity. Using cross-country evidence, I show that fiscal adjustments are primarily driven by fiscal conditions and that political ideology mainly influences their composition, particularly the choice between tax-based and spending-based consolidations. I then develop a heterogeneous-agent New Keynesian (HANK) model to evaluate the macroeconomic, welfare, and political support implications of alternative adjustment strategies. A key contribution of the paper is to bridge the gap between empirical estimates of the macroeconomic effects of austerity programs and the predictions of standard HANK models. By matching the short-run output costs documented in the empirical literature, the model provides a more credible framework to assess how the composition of fiscal adjustments shapes both economic outcomes and political support. While lower public debt can generate long-run gains, fiscal adjustments impose heterogeneous short-run costs across households. As a result, support for austerity depends on income, wealth, and risk exposure, linking the distributional effects of fiscal policy to its political feasibility.
WORKING PAPERS:
- "Macro Implications of Inequality-driven Political Polarization."
Abstract: This paper builds a model of heterogenous agents, incomplete markets and idiosyncratic shocks extended with a political mechanism that allows for realistic party competition. Higher inequality leads to more disperse policy preferences, to which parties respond endogenously distancing themselves from median voter preferences. The polarization of party proposals leads to greater uncertainty before elections, as well as greater policy switches after them. The model quantifies the macroeconomic effects generated by inequality through a political channel that differ from the one behind the widespread median-voter hypothesis. Results are in line with previous empirical evidence linking inequality, polarization and macroeconomic performance, and are robust to the inclusion of abstention and ideology.
- "Unequal Political Business Cycles: Inequality, Political Conflict and the Macroeconomy.''
Abstract: This paper explores the existence of political cycles that are contingent on inequality. I claim that high inequality leads to high policy uncertainty during election years as pressures for redistribution increase at the same time that the wealthy become politically more powerful. This higher policy uncertainty harms the economy through channels already studied by the literature. I explore empirically the presence of an unequal political business cycle (UPBC) using three different strategies. First, I implement a panel estimation in a group of 25 countries spanning four decades. Second, I use historical data for the US from 1947 to 2018 and 18 elections. In both cases I find evidence supporting the mechanism: GDP falls below its trend during an election only when inequality is sufficiently high. Similarly, elections are associated with a decline in the private components of aggregate demand and, for the US case, a spike in policy uncertainty, only when inequality is high. The third strategy runs estimations using microeconomic data from the PSID, which show that wealth-poor households decrease relatively more their expenditure rates during election years, evidence that is in line with elections impacting private consumption through policy uncertainty in times of high inequality.
- "Welfare Effects of Fiscal Procyclicality: Public Insurance with Heterogeneous Agents"
Abstract: This paper pursues a welfare analysis of fiscal policy, specifically public spending, in an economy with heterogenous agents and incomplete markets. The main quantitative exercise consists in measuring the gains of switching from the (procyclical) spending path of the typical developing country to an acyclical or countercyclical path. The model emphasizes the role of transfer payments from the government to households in alleviating the costs of idiosyncratic shocks. Since these correlate with aggregate shocks, the way fiscal policy is conducted along the business cycle has important welfare effects. I find that the costs of procyclicality are relatively large and very heterogeneous. While wealth-rich agents don't suffer from procyclicality, poor agents, being either unemployed or unskilled, lose the most. In terms of life-time consumption equivalents these agents may lose as much as 2% from fiscal procyclicality, considering only the fraction of spending that is allocated as transfer payments.
PUBLICATIONS:
- "Productivity, Investment and Wealth Dynamics under Financial Frictions,'' with Matías Tapia and Lucciano Villacorta. Quantitative Economics (Conditionally Accepted).
- "Rebellions, Technical Change, and the Early Development of Political Institutions in Latin America." Journal of Comparative Economics 47(1):65-89, 2019. [WP]
- "Contracting Institutions and Economic Growth." Review of Economic Dynamics 24:192-217, 2017. [WP]
- "The Risk of Civil Conflicts as a Determinant of Political Institutions." European Journal of Political Economy 42:36-59, 2016. [WP]
- "Fiscal Policy and Civil Conflict in Africa." Journal of African Economies 25(4):614-36, 2016.
- "Asymmetric Adjustment of Real Exchange Rate Misalignments in Chile.'' With César Calderón. Economía Chilena 16(3):90-101, 2013. (in Spanish).
- "Using Dynamic Factor Analysis to Forecast Chilean Macroeconomic Variables.'' With Luis Felipe Céspedes. Economía Chilena 7(3):35-46, 2004. (In Spanish).
- "About International Reserve Adequacy.'' With Eduardo Lopez, Alberto Naudon and Claudio Soto. Economía Chilena 7(3):5-34, 2004. (In Spanish).
BOOK CHAPTERS:
- "Credibility of Emerging Markets, Foreign Investors’ Risk Perceptions, and Capital Flows: an Overview," with Andrés Fernández and Sebnem Kalemli-Ozcan. In Credibility of Emerging Markets, Foreign Investors’ Risk Perceptions, and Capital Flows, ed. by A. Aguirre, A. Fernández and S. Kalemli-Ozcan, 2023.
- "Monetary Policy and Financial Stability: Transmission Mechanisms and Policy Implications. An Overview,'' with Markus Brunnermeier and Diego Saravia. In Monetary Policy and Financial Stability: Transmission Mechanisms and Policy Implications, ed. by A. Aguirre, M. Brunnermeier and D. Saravia, 2019.
- "Capital Flows, Macro-Prudential Policies, and Capital Controls'' with Sofía Bauducco and Diego Saravia. In Monetary Policy and Financial Stability: Transmission, Mechanisms and Policy Implications, ed. by A. Aguirre, M. Brunnermeier and D. Saravia, 2019.
- "Structural Changes From Partial to Full-Fledged Inflation Targeting in Chile.'' with Klaus Schmidt-Hebbel. In Monetary Policy in Emerging Markets and other Developing Countries, ed. by N. Batini, 2007.
- "Economic Growth and Pension Reform in Chile.'' In Avances, Experiencia Internacional y Retos de los Sistemas de Ahorro para el Retiro, Consar, 2006. (In Spanish).
OLD WORKING PAPERS:
- "Optimal Spending and Saving Strategies for Commodity-Rich Countries.'' Central Bank of Chile Working Paper N909, 2021.
- "The Resource Curse: Does Fiscal Policy Make a Difference?'' with Mario Giarda. Central Bank of Chile Working Paper N761, 2015.
- "Real Exchange Rate Misalignments and Economic Performance,'' with César Calderón. Central Bank of Chile Working Paper N315, 2005.