The Imperfections of Conditional Programs and the Case for Universal Basic Income (joint with Diogo Lourenço) Pdf
Revise and Resubmit at the American Economic Journal: Macroeconomics
Abstract: How costly are the imperfections of conditional welfare programs? Should we replace these programs, in whole or in part, with a Universal Basic Income (UBI)? We answer these questions using a general equilibrium model with incomplete markets, accounting for three overlooked imperfections of real-life conditional programs: incomplete take-up, illegitimate transfers, and administrative costs. We find that these imperfections, especially incomplete take-up, significantly reduce welfare. Also, diverting 40\% of the current welfare expenditure to finance a UBI maximizes welfare by mitigating distortions and reaching those in the dead angle of conditional programs. Conditional programs and UBI are, thus, complementary policy instruments.
Does Incomplete Take-Up Matter? The Case of Unemployment Insurance (joint with Diogo Lourenço) Pdf
Abstract: Only a few of the eligible take up Unemployment Insurance (UI). Yet, the literature evaluating UI in macroeconomic settings typically assumes that take-up is costless and complete. We show that this assumption leads to an overestimation of UI's net welfare gains in a general equilibrium model with incomplete markets. In fact, when we account for incomplete take-up, we find that the current UI program lowers welfare in the US. Take-up costs are key: they lower individual net gains from UI to the extent that they fail to outweigh the program's aggregate distortions. Suitably reformed, UI could slightly increase welfare. A uniform transfer of about USD 500 for 14 months to UI recipients would discourage take-up among the better off, reducing distortions and take-up costs, and enhancing redistribution.
Firm and Consumption Inequality (joint with Daniel V. Santos)
Abstract: Consumption inequality in the US has barely increased since the 1990s, while earnings inequality widened markedly. Simultaneously, firm inequality, as measured by firms' wage dispersion, has increased. This paper links the two trends. We use a quantitative general equilibrium model with incomplete markets and sorting of heterogeneous workers and firms in a frictional labor market. In the model, an increase in firm inequality strengthens sorting, directly increases earnings inequality, and increases earnings risk, stimulating precautionary savings. Calibrating the model to the observed 27.2% widening in earnings between the top and bottom deciles, we find that the same households’ consumption inequality rises only 3.7%, almost matching the 2.4% observed in the data.
Endogenous Growth and Monetary Policy: How Do Interest-Rate Feedback Rules Shape Nominal and Real Transitional Dynamics?, Journal of International Money and Finance, 2023 (joint with Pedro M. Gil and Gustavo Iglésias)
Abstract: Monetary authorities have followed interest-rate feedback rules in apparently different ways over time and across countries. The literature distinguishes, in particular, between active and passive monetary policies in this regard. We address the nominal and real transitional-dynamics implications of these different types of monetary policy, in the context of a monetary growth model of R&D and physical capital accumulation. In this setup, well-behaved transitional dynamics occurs under both active and passive monetary policies. We carry out our study from three perspectives: the convergence behaviour of catching-up economies; a structural monetary-policy shock (i.e., a change in the long-run inflation target); and real industrial-policy shocks (i.e., a change in R&D subsidies or in manufacturing subsidies). We uncover a new channel through which institutional factors (the characteristics of the monetary-policy rule) influence the economies’ convergence behaviour and through which monetary authorities may leverage (transitional) growth triggered by structural shocks.
Looking Ahead at the Effects of Automation in an Economy with Matching Frictions, Journal of Economic Dynamics & Control, 2022 (joint with Pedro M. Gil)
Abstract: We look at how advances in AI and Robotics will affect employment in an economy with matching frictions and endogenous job destruction. In the model, tasks can be produced by workers or by machines. Workers have a comparative advantage in producing advanced tasks but machines tend to catch up with labor, leading to automation. To calibrate the model, we rely on predictions in the literature about the expected share of automated jobs due to AI and Robotics. Our model suggests that these technological innovations will raise job destruction but also job creation. Therefore, they may reduce long-run employment but not massively. Furthermore, employment will likely rise if consumers value human interactions (human touch) as the relative price of labor tasks increases with widespread usage of machines. Regarding policy, our model suggests that an automation tax trumps a robot tax.
Explaining the Labor Share: Automation Vs Labor Market Institutions, Labour Economics, 2022 (joint with Pedro M. Gil)
Abstract: We propose a simple model to assess the evolution of the US labor share and how automation affects employment. In our model, heterogeneous firms may choose a manual technology and hire a worker subject to matching frictions. Alternatively, they may choose an automated technology and produce using only machines (robots). Our model suggests that automation shocks reduce the labor share but increase employment and wages. Furthermore, our model suggests that labor market institutions are unlikely to have played a major role in the fall of the US labor share after 1987. Instead, technological factors are a more promising candidate.
The Cyclicality of Job Search Effort in Matching Models, Oxford Economic Papers, 2022 (joint with Alper Çenesiz)
Abstract: The canonical matching model is the workhorse model of the labor market but lacks a proper amplification mechanism for productivity shocks. One way to amplify the effects of shocks is to allow workers to endogenously adjust their job search effort: as search effort is procyclical in the canonical model, volatilities increase. Yet, the empirical literature points against procyclical search effort, raising doubts of how acyclical (or counteryclical) search effort can coincide with volatile labor market variables in matching models. We show that they can coincide in a model with procyclical value of leisure and alternating-offer wage bargaining.
COVID-19: What If Immunity Wanes? Canadian Journal of Economics, 2022 (joint with Alper Çenesiz)
Abstract: Using a simple economic model in which social-distancing reduces contagion, we study the implications of waning immunity for the epidemiological dynamics and social activity. If immunity wanes, we find that COVID-19 likely becomes endemic and that social-distancing is here to stay until the discovery of a vaccine or cure. But waning immunity does not necessarily change optimal actions on the onset of the pandemic. Decentralized equilibria are virtually independent of waning immunity until close to peak infections. For centralized equilibria, the relevance of waning immunity decreases in the probability of finding a vaccine or cure, the costs of infection (e.g., infection-fatality rate), the degree of partial immunity, and the presence of other NPIs that lower contagion (e.g., quarantining and mask use). In simulations calibrated to July 2020, our model suggests that waning immunity is virtually unimportant for centralized equilibria until at least 2021. This provides vital time for individuals and policymakers to learn about immunity against SARS-CoV-2 before it becomes critical.
Antibody Tests: They Are More Important Than We Thought, Journal of Mathematical Economics, 2021
Abstract: Antibody testing is a non-pharmaceutical intervention -- not recognized so far in the literature -- to prevent COVID-19 contagion. I show this in a simple economic model of an epidemic in which agents choose social activity under health state uncertainty. In the model, susceptible and asymptomatic agents are more socially active when they think they might be immune. And this increased activity escalates infections, deaths, and welfare losses. Antibody testing, however, prevents this escalation by revealing that those agents are not immune. Through this mechanism, I find that antibody testing prevents about 12% of COVID-19 related deaths within 12 months.
Sticky Price Models, Durable Goods, and Real Wage Rigidities, Journal of Money, Credit and Banking, 2018 (joint with Alper Çenesiz)
Abstract: The standard two‐sector New Keynesian model with durable goods is at odds with conventional wisdom and vector autoregression (VAR) evidence: Following a monetary shock, the model generates (i) either negative or no comovement across sectoral outputs and (ii) aggregate neutrality of money when durable goods' prices are flexible. We reconcile theory with evidence by incorporating real wage rigidities into the standard model: As long as durable goods' prices are more flexible than nondurable goods' prices, we obtain positive sectoral comovement and, thus, aggregate nonneutrality of money.
Low Skill Wages and Mismeasured Inflation, Applied Economics Letters, 2018
Abstract: The current literature presents evidence that the real wage of male workers at the 10th percentile of the wage distribution has fallen since 1970. Yet, contributions within this literature deflate nominal wages using a mismeasured deflator. Aghion et al. (2018) document that this mismeasurement is on average larger than 0.6 percentage points per year. In this paper, I adjust the deflator and reestimate the implied evolution of male low skill wages. This simple exercise implies that male low skill wages were about 15 log-points higher in 2013 than in 1970.
Comments on “The Effect of a Common Currency on the Volatility of the Extensive Margin of Trade”, Journal of International Money and Finance, 2013 (joint with Stéphane Auray, Aurélien Eyquem, and Jean–Christophe Poutineau)
Abstract: In this note, we correct two typos contained in the published version of Auray et al. (2012), which affect the quantitative results, without modifying the qualitative results and then the message of the paper. In addition, we present a modified pricing rule for exported goods, and allow export prices to be sticky as well. This extension slightly improves the quantitative predictions of the model. Finally, predictions are made closer to the data when considering an alternative inflation target.