Working Papers
We propose a novel methodology for solving Heterogeneous Agents New Keynesian (HANK) models with aggregate uncertainty and the Zero Lower Bound (ZLB) on nominal interest rates. Our solution strategy combines the sequence-state Jacobian methodology in Auclert et al. (2021) with a tractable structure for aggregate un-certainty by means of a two-regimes shock structure. Using our methodology, we show that: 1) in the presence of the ZLB, a dichotomy emerges between the economy’s impulse responses under aggregate uncertainty against the deterministic case; 2) aggregate uncertainty amplifies downturns at the ZLB, and household heterogeneity increases the strength of this amplification; 3) the impact of forward guidance is stronger when there is aggregate uncertainty.
We develop a heterogeneous-agent, overlapping-generations model with nonhomothetic preferences that considers the most prominent proposed explanations for the decline in the natural rate of interest r* in the United States. The model accounts for a 4.3 percentage point decline between 1965 and 2015, within the range of empirical estimates. The trend is largely driven by changes in productivity growth, demographics, inequality, and the labor share. Although demographic forces will keep exerting downward pressure on r*, we expect a trough to be reached around 2030, driven by the rise in public debt. Furthermore, our probabilistic analysis suggests that a reversion toward the levels of r* seen in the past is extremely unlikely. Finally, we find that the impact of policy variables such as taxes and social security can be considerable.
This paper studies the distributive effects of banking sector losses on household consumption and welfare. Using data from the Consumer Expenditure Survey, we document that in response to declines in bank equity returns the consumption of low-income households decreases by roughly twice as much as the average. To understand this result, we develop a heterogeneous-agent model featuring rich income and portfolio heterogeneity and a banking sector subject to financial frictions. The model matches the empirical inequality in consumption responses following a shock to banks’ asset returns. Households at the bottom of the income distribution suffer from losses in labor earnings and from an increase in the cost of borrowing. In contrast, high-income consumers can take advantage of temporarily low asset prices and high future returns and increase their savings to sustain a higher consumption in the medium term. In fact, a fraction of households benefits from distress in the banking sector. A debt-financed asset purchase program can improve welfare, especially for low-income individuals, by dampening the increase in credit spreads and stabilizing investment.
Presented at the CEA, SAET, CEF, VfS , CBMMW, RCEA, and WIEM Meetings, and the BSGE Summer Forum (2021).
Universal Basic Income in Developing Countries: Pitfalls and Alternatives (with Pedro Ferreira and André Valério)
We study the short- and long-term effects of Universal Basic Income programs - a uniform transfer to every individual in society - in the context of a developing economy and compare this policy with other schemes that condition the transfer on household characteristics such as income and education. We construct a dynastic heterogeneous-agent model, featuring uninsurable idiosyncratic risk, investment in physical and human capital, and choice of labor effort. We calibrate the model to Brazilian data and introduce a UBI transfer equivalent to roughly 4.5% of average household income. We find that, over the short run, this policy alleviates poverty and increases welfare, especially for the poor. Over time, however, income falls and poverty and inequality increase as fewer people stay in school, labor supply decreases, and savings fall. We then explore the consequences of an equivalent transfer that is both subject to means testing and requires recipients to enroll their children in school. This policy outperforms the UBI in several dimensions, increasing overall income, reducing poverty and inequality, and improving welfare. This result is robust to varying the magnitude of the cash transfer. We then investigate which aspects of the CCT make it so effective, and find that the schooling conditionality is crucial in ensuring its long- and even short- run success.
Presented at the SED , CEA, and LACEA , and LuBramacro meetings (2021).
I study the procompetitive gains of improving financial markets. To this end, I extend an otherwise static model of oligopolistic competition to account for dynamic capital accumulation and financial frictions in the form of collateral requirements. In this environment, exogenous frictions in the input markets interact with the endogenous misallocation that arises due to market power. I discipline the model using a large panel dataset of Chilean manufacturing establishments, and find that improving capital markets leads to a decrease both in the level and in the dispersion of markups. In fact, the procompetitive gains can account for more than 50% of the total benefits of financial development. Previous studies, which either assume perfectly competitive markets or constant markups, thus underestimate the impact of better financial institutions.
Presented at the Transatlantic Doctoral Conference, ECB Internal Seminar Series (2019).
How does bankruptcy protection affect household balance sheet adjustments and aggregate consumption when credit tightens? Using a tractable model of unsecured consumer credit we quantify the trade-off between the insurance and the creditworthiness effects of bankruptcy in response to tighter credit. We show that bankruptcy dampens the effect of tighter credit on aggregate consumption on impact. This is because it allows borrowers to sustain consumption against severe financial distress. However, by leading to consumers' exclusion from the credit market for a certain period, bankruptcy also reduces their ability to smooth consumption over time, implying a slower recovery. The bankruptcy code establishes how costly it is to default, and, thus, plays a crucial role in determining consumers' bankruptcy decisions and in shaping consumption dynamics. We quantify that the 2005 BAPCPA reform, by making filing for bankruptcy more costly, worsened the negative welfare effects of the subsequent credit tightening.
Presented at ECB Workshop on Household Heterogeneity (2018), SAET (2019), CEA Annual Meeting (2021).
Work in Progress
Optimal Unemployment Insurance - The Role of Human Capital Dynamics
In this paper, I evaluate the consequences of human capital dynamics for the design of unemployment insurance. Along with partial equilibrium (Baily-Chetty) efficiency-insurance considerations, the central planner trades off two opposing forces: first, generous benefits discourage job search and ultimately job creation due to changes in the skill composition of the labor force; but increased social insurance also reduces the welfare costs of business cycles by both preventing excessive cyclical income fluctuations and due to its role as an automatic stabilizer. I examine the relative importance of these mechanisms in a heterogeneous-agent New-Keynesian model with labor market frictions and human capital dynamics.
Optimal Unemployment Insurance in Informal Labour Markets (with Luca Riva and Aditi Singh)
In developing countries, weak enforcement of labour and tax regulations creates an opportunity for employers to collude with employees and manipulate the unemployment insurance system. In particular, workers who are eligible for benefits have an incentive to agree with their employers to transition into informality and share the proceeds from unemployment checks. We study the importance of this mechanism for the design of optimal unemployment insurance policies in a quantitative Diamond-Mortensen-Pissarides model calibrated with Brazilian data.
Publications
The Long-Term Effects of Conditional Cash Transfers on Child Labor and School Enrolment (with Pedro Cavalcanti Ferreira) - Economic Inquiry, May 2017.