Paper

In economies with fixed exchange rates, the adjustment to government spending shocks is asymmetric. Expansionary shocks are absorbed by the real exchange rate, contractionary shocks by output. This result emerges in a small open economy model with downward nominal wage rigidity and is supported by new empirical evidence based on panel data from different exchange-rate regimes. The exchange-rate regime, economic slack, inflation, and how spending is financed all matter for the fiscal transmission mechanism in the way predicted by the model. Estimates that fail to distinguish between the effects of positive and negative shocks are subject to a “depreciation bias”.

Preliminary draft

Informality is pervasive in many developing economies and is often accompanied by low investment in human capital.  We study the effects of international trade through the lens of a model with heterogeneous firms and workers, featuring labor market frictions. Complementarity between workers' human capital investment decisions and firms' hiring strategies can give rise to multiple equilibria. In the "bad" equilibrium, informality is prevailing and  human capital investment is low. In the "good" equilibrium, workers invest more in human capital and firms have stronger incentives to formalize. We show that, under certain conditions, trade liberalization can act as a coordinating device that shifts the economy toward the good equilibrium. The novel mechanism we uncover involves effort in human capital investment as a key margin of adjustment to trade shocks.