Research
Publications and Accepted Papers
Heterogeneity in Wage Setting Behavior in a New Keynesian Model. With Sylvester Eijffinger and Burak Uras. 2019. (Macroeconomic Dynamics).
In this paper we estimate a New‐Keynesian DSGE model with heterogeneity in price and wage setting behavior. In a recent study, Coibion and Gorodnichenko (2011) develop a DSGE model, in which firms follow four different types of price setting schemes: sticky prices, sticky information, rule of thumb, or flexible prices. We enrich Coibion and Gorodnichenko (2011) framework by incorporating heterogeneity in nominal wage setting behavior among households. We solve this DSGE model and estimate it using Bayesian techniques for the United States economy for the period of 1955‐2014. Our results confirm the previous findings in the literature regarding the importance of nominal rigidity in wages to better match the macroeconomic data. More importantly, we identify qualitative as well as quantitative business cycle features allowed by the heterogeneity in wage rigidity, such as the persistence in price and the wage inflation, which a standard New Keynesian model with only Calvo‐type wage rigidity fails to achieve. We also show that modelling wage rigidity heterogeneity ‐ as oppose to standard‐Calvo‐wages ‐ amplifies the macroeconomic output fluctuations resulting from a technology shock whereas it mitigates the output fluctuations following a monetary tightening.
Working papers
This paper analyses the stability and welfare effects of greater wage flexibility in an economy where a fraction of households do not have access to financial markets. A medium-size New Keynesian DSGE model is proposed and used to investigate the effects of the interaction of these two frictions. The results show that once limited asset market participation is considered, greater wage flexibility increases the volatility of key macroeconomic variables and its effect is amplified when the monetary policy is restricted by the zero lower bound. Regarding welfare, the analysis reveals that, in a context of limited asset market participation, greater wage flexibility is welfare improving only for implausible initial high degrees of wage rigidity, and even in that case the gains are small. Except that extreme case, greater wage flexibility considerably reduces welfare when even a small fraction of households are financially constrained.
Rigid Wages & Contracts: Time- vs State-Dependent Wages in the Netherlands. With Burak Uras and Nathanael Vellekoop. 2018.
We study nominal wage rigidity in the Netherlands during the Great Recession. The data we use has three unique features: (1) high-frequency (monthly), (2) high-quality (administrative records), and (3) high coverage (the universe of workers and the universe of firms). We find substantial heterogeneity in the frequency of wage changes due to explicit terms of the labor contract. Contracts featuring flexible hours, overtime hours and contracts with a fixed period of time have a higher probability of a change in the contract wage. As a second finding we report substantial heterogeneity in the wage rigidity between industries as well as differences within the year and between years. We estimate hazard models for the duration of a change in the contract wage, and confirm earlier findings in the literature that the hazard has two spikes, one at 12 months and one at 24 months. Moreover, we found that wage changes have a time and state dependency component. Once we split the sample based on contract characteristics, we find that the response of wage changes to the time and state component is heterogeneous across the different type of contracts. This heterogeneity is particularly evident in flexible-hours, tenured, full-time and part-time contracts.
Automated Variable selection methods for forecasting Colombian inflation. 2014
Automated variable selection methods are useful procedures in the specification of models aimed at forecasting an economic variable. This paper qualitatively examines the ability of several of these methods to identify the best model intended to generate one-step forecasts of Colombian inflation. Examination of a large set of candidate models that include simple autoregressive specifications as well as additional regressors revealed that no specific automatic procedure dominates but that methods that rely on exhaustive searching of all possible subsets of variables tend to select models with better forecasting performance. Preliminary evidence suggests that a combination of forecasts obtained using different methods may yield better performance than the forecast of any one model.
A tradable and non-tradable classification for the Colombian economy (in Spanish). With Deicy Cristiano and Mario Ramos. Central Bank of Colombia, Working papers series. 675. 2011.
This paper develops, on the basis of goods and services from national accounts, a classification of the Colombian economy between tradable and non-tradable sectors according to their degree of export or import orientation and to the relationship between the movements of their prices and the exchange rate. The methodology offers several advantages over traditional classification methods: (i) a greater representativeness of all goods and services in the economy, (ii) a greater accuracy in estimating the size of each sector and (iii) it has greater objectivity in the selection criteria. Based on the classification of products between tradable and non-tradable, price indices are constructed for these sectors (and for goods and services imported and exported) using information from producers, consumers, and other sectoral price indicators. Two applications of these indices to the Colombian economy are presented: an index of terms of trade and an indicator of real exchange rate.
What do confidence indicators tell us? (in Spanish). With Juan Manuel Julio. Central Bank of Colombia, Working papers series. 659. 2011.
The information content of the confidence indicators used by Banco de la República in the preparation of its Inflation Report is measured. The frequencies at which their variations occur are determined and compared to the frequencies of similar measures in the United States and some Latin American countries. The relationship between the confidence indicators and a substantially large set of local and international economic activity indicators is also studied. These indicators include the GDP and its components. It is also determined whether or not the confidence indices or its individual questions provide additional information to that available in real time exercises on the determination of the state of the economy. Finally, the relationship between the confidence indicators and those of other countries during the recent international financial crisis is studied.
Direct forecasts of Colombian inflation (in Spanish). With Eliana González and Luis Fernando Melo. Central Bank of Colombia, Working papers series. 458. 2007.
In countries like Colombia, where an inflation strategy is followed, it is fundamental for the Central Bank to have good models to forecast inflation. This paper compares inflation forecasts obtained from a Phillips curve model using two different methodologies: direct forecasts and iterative (traditional) forecasts for a quarterly sample between 1988 and 2007. Direct forecasts are based on OLS estimates, while the iterative ones are based on estimates by both OLS and flexible least squares. The results show that when using the same method of estimation, OLS, the forecast error of the direct methodology is smaller than that of the iterative in the medium term. However, the iterative forecasts generated with the flexible least squares methodology surpass the direct - OLS.