Juan Carlos Castro-Fernandez
Economics Ph.D. University of Warwick
Junior Researcher at Banco de la República
About me
I am an Economics PhD, affiliated with the Macroeconomic Modelling Department at the Colombian Central Bank (Banco de la República)
Business cycles, financial macroeconomics, and monetary economics are my main areas of expertise and interest. I am particularly interested in the links between business and financial cycles and the determinants of slow recoveries. My current research papers evaluate the differential nature of financial crises and its apparent relationship with deeper recessions and slow recoveries. While my work in progress is twofold, opn one hand, my works is aimed to find alternative explanations to slow recoveries and, in particular, to evaluate the possible link between skilled labour mobility and growth during recoveries. On the other hand, my most recent projects focus on the undertandign of what features of DSGE models help to a improve the forecasting for monetary policy analysis and to evaluate DSGE models performance vs semi-parametric and non-parametric forecasting models.
Research
Optimistic Expectations and Financial Crises (Submitted)
I evaluate whether recessions accompanied by financial crises are different in a framework where pre crisis dynamics – especially debt burden – and expectations play a role in determining the magnitude of the recession. This is consistent with some empirical evidence. I model financial optimism as unrealised news on capital quality in a DSGE framework with financial intermediaries. I found that cycles associated with financial optimism differ from those caused by technological news: the former generate asset prices boom-bust cycles, stronger debt cycles and deterioration in banks’ net worth. Real variables respond in a similar qualitative way to unjustified optimism, whether it produces a financial crisis or not.
Keywords: Financial crises, deep recessions, slow recoveries, debt overhang, news shocks, boom – bust cycles.
It has been claimed that financial crises tend to be accompanied by deeper recessions and slower recoveries, partly due to debt burden (e.g. Reinhart & Rogoff, 2009; Hong and Tornell, 2005; Jordà, et al., 2013). I evaluate this claim against the contrasting view that magnitude and persistence of recessions is rather the consequence of bigger and more persistent shocks (Stock & Watson, 2012). To do so, I compute recovery and recession paths through the estimation of impulse responses by local projections methods (Jordà, 2005). I found that the occurrence of financial crises is associated with more severe recessions only if the recession itself is big enough (the output loss is above its historical average). More importantly, neither the magnitude of the loss, nor the occurrence of financial crises, nor high debt accumulation seem to be associated with sluggish output growth during recoveries.
Keywords: Financial Crises, Deep Recessions, Slow Recoveries, Local Projections, Business Cycles, Debt Over-hang.
Work in Progress
Accounting for pure news shocks in business cycles
Description: In this project I aim to quantify the importance of financial and technological purely noisy news in the business cycles by using the information we can get from estimated DSGE models. Previous literature quantifies news shocks but do not differentiate between realised and unrealised news. Since the more interesting dynamics in simulated models arise when expectations are wrong, it is important to distinguish between the two categories of news. A fist steep in this direction is the paper by Sims (2016) where he introduced a novel variance decomposition strategy. Unlike him, I use the information of real episodes where the news shocks were counteracted by contemporaneous shocks. In this way, I should be able to isolate the effect of unrealised news rather than the anticipation effect of both unrealised and realised news.
Skill biased labour mobility and slow recoveries
Description: The aim of this project to quantify the importance of skill biased migration in determining the growth rate during economic recoveries following deep recessions. If highly productive people abandon economies with worse outcomes after an economic crisis, the later not only affects physical capital, but also human capital. In that sense, a crisis may reduce the stock of human capital and, through a brain drain effect, productivity. That could help to explain the wide dispersion in the speed of recovery between economies with similar level of development. To answer this question I use data of inter-state migration and growth for the U.S. And international migration within the Euro Area.
What financial frictions better fit the data? An evaluation on a small open economy DSGE model.
Description: Chen et al (2020) discipline the selection of financial frictions in a Macroeconomic model using microdata for the US during the Great Recession. The estimation of their model revels that exogenous credit supply shocks account for a significant portion of the business and financial cycles. Would this same selection of financial frictions give results for a small open economy model? To answer this, I add financial frictions a la Chistiano, Motto & Rostano (2014), Bernanke, Gertler & Gilchrist (199) and Gertler and Karadi (2011) to an otherwise standard small open economy DSGE model. Then I estimate the model using data for a bunch of emerging countries. I expect to find results in line to those on Chen et al (2020).
Inflation forecasting in times of COVID-19 (work in progress) with Norberto Rodriguez.
Description: Theoretical models usually perform worse than auto-regressive models in terms of their inflation forecasting error. This forecast ability is even worse when rare events happen. In particular, COVID pandemics have implied a challenge to policy makers and market forecaster to accurately predict the economic dynamics. Recently Primiceri and Tambaloti (2020) propose a methodology to inform the assumptions needed to capture the pandemics effect on a standard DSGE. On the other hand, McKnight, Mihailov and Rumler (2020) proposed the inclusion of a time varying trend in a Philips curve model to forecast inflation. This resulted in improvements on the forecasting performance in the US and Euro Area. We propose an exercise where we compare the inflation forecasts of a VARX, the modified Phillips curve model and the DSGE model with assumptions a la Primiceri and Tambalotti.
Other Publications
Financial fragility and exchange rate, 2011 (in Spanish)
Abstract: A modification to the Foley (2003) model is presented here introducing the role of exchange rate and foreign currency denominated debt in order to determine their influence on financial fragility, using the financial instability hypothesis of Hyman Minsky under flexible exchange rate regime. Firms' financial positions (hedge, speculative, and Ponzi) are affected by the movements of the exchange rate and of the interest rate. In the model nominal depreciation has real effects and may cause financial and economic crises. Sudden depreciation leads to reductions in profit and investment rates through increases in credit costs and supply prices of capital goods .
Key words: financial crisis, post-keynesian macroeconomic models, exchange rate, private sector foreign debt. JEL: E12, E32, F41, G01.