Research
Working Papers
"Innovation During Challenging Times", with Danilo Cascaldi-Garcia and Sarah Zubairy
When is receiving positive news regarding future technological advancements most impactful on the economy: during recessions or economic booms? A recession might represent an opportune time for investing in relatively cheaper, productivity-enhancing activities. However, tighter financial constraints during recessions might hinder the ability to secure funds for these activities. We explore this dichotomy by exploiting patent-based innovation shocks, which are constructed using changes in stock market valuations of firms that obtain patent grants. We find that aggregate patent-based innovation shocks have a greater impact on the economy during recessions, leading to a more significant increase in private investment. Additionally, our exploration of firm-level data uncovers supporting evidence that firms tend to boost their capital investment and R\&D expenditures in response to these innovation shocks, particularly during recessions. The financial constraints of firms play a crucial role, with capital investments by firms with low default risk driving the larger impact observed during recessions.
"Exchange Rate Dynamics in an Estimated Small Open Economy DSGE Model", Working Paper, 2007
Publications
Delayed Adjustment and Persistence in Macroeconomic Models, with Thijs van Rens Journal of Money, Credit and Banking, January 2023.
Estimated impulse responses of investment and hiring, unlike their model equiv alents, typically peak well after the impact of a shock. We argue that such hump-shaped responses arise naturally in an otherwise standard model with adjustment costs in capital and labor when we relax the assumption that the production technology is separable over time. This result holds for both non-convex and convex cost functions, and for reasonable parameter values the e.ect is strong enough to match the persistence observed in the data. We discuss some evidence for our explanation and ways to test the model.
How Distorted Food Prices Discourage a Healthy Diet, with Roberto Pancrazi and Thijs van Rens , Science Advances , 8 (13), 30 March 2022.
A short VIDEO about our work.
Coverage: Science Breaker.
Public policy making for the prevention of diet-related disease is impeded by a lack of evidence on whether poor diets are a matter of personal responsibility or a choice set narrowed by environmental conditions. An important element of the environment are market imperfections in food retail that distort prices. We use a rich dataset on quantities and prices of food purchases in the US and a structural model of dietary choices to examine variation in diets across household that have different levels of income and live in different neighborhoods. We find that price distortions account for one-third of the gap between the recommended and actual intake of fruits and vegetables. A feasible fiscal intervention that remedies these distortions makes all consumers better off.
"Patent-Based News Shocks" with Danilo Cascaldi-Garcia , The Review of Economics and Statistics (2022) 104 (1): 51–66. Download Online Appendix here.
Download the Original and Extended Series of the structural shock (1962Q1-2010:Q4, and from 1962Q1-2019:Q4 ) here.
Coverage: Economics Observatory.
What do patents tell us about the economic effects of future technological improvements? We identify aggregate and industry level patent-based news shocks by exploiting changes in stock market valuations of firms that obtain patent grants. Our shocks resemble diffusion news, as they do not affect total factor productivity in the short run but induce a strong permanent effect after five years. We find that patent-based news shocks produce positive comovement between consumption, output, investment, and hours. They also generate positive responses in inflation and in the federal funds rate, consistent with standard New Keynesian models.
"Welfare Gains of Bailouts in a Sovereign Default Model" with Roberto Pancrazi and Hernan S. Seoane, Journal of Economic Dynamics and Control, 113, April 2020.
( this is a substantially revised version of the draft circulated as "Welfare Costs of Sovereign Debt Crises: the Role of Bailouts")
We examine the welfare effects of bailouts in economies exposed to sovereign default risk. When a government of a small open economy requests a bailout from an international financial institution, it receives a non-defaultable loan of size G that comes with imposed debt limits. The government endogenously asks for the bailout during recessions and repays it when the economy recovers. Hence, the bailout acts as an imperfect state contingent asset that makes the economy better off. The bailout duration is endogenous and increases with its size. The bailout size creates non-trivial tradeoffs between receiving a larger amount of relatively cheap resources precisely in times of need on the one hand, and facing longer-lasting financial constraints and accumulated interest payments, on the other hand. We characterize and quantify these tradeoffs and document that welfare gains of bailouts are hump-shaped in the size of bailout loans.
"Sectoral Effects of News Shocks", Oxford Bulletin of Economics and Statistics, 81, March 2019, 215–249. ( this is a substantially revised version of the draft circulated as "A Sectoral Approach to News Shocks" )
This paper argues that an aggregate news shock reveals news about technological improvements in the durable goods sector. Better technological prospects translate into large responses of the fundamentals in the durable goods sector; much larger than the responses of the fundamentals in the nondurable goods sector. These better technological prospects, contrary to common belief, do not induce short-run comovement among fundamentals within either of the two sectors. The behavior of inventories, an important margin that durable goods producers can use to buffer news shocks, proves to be crucial for reconciling the effects of news shocks in a two-sector model with the data.
"Inflation Sensitivity to Monetary Policy: What has Changed since the Early 1980's" with Roberto Pancrazi, Oxford Bulletin of Economics and Statistics, 81, March 2019, 412-436. (Previously circulated as "On the Effectiveness of Conventional Monetary Policy")
Have conventional monetary policy instruments maintained the same ability to accommodate undesirable effects of shocks throughout the post-war period? Or has the changed economic envi- ronment characterizing the last thirty years diminished the sensitivity of macroeconomic volatility to systematic changes in the conduct of monetary policy? The answer is no to the first question and, consequently, yes to the second question. We estimate a medium-scale New-Keynesian model in two subsamples, 1955-1979 and 1984-2012, and find that the sensitivity of inflation variance to changes in conventional monetary policy has declined. We document that the changed properties of the labor market largely contributed to this decline.
"The Price of Capital and the Financial Accelerator", with Roberto Pancrazi and Hernan Seoane, Economics Letters, Volume 140, December 2016, Pages 86-89
The price of capital is a key determinant of the financial accelerator, a trans- mission mechanism of shocks generated through the capital accumulation process of entrepreneurs that borrow in credit markets with frictions. This paper shows that the procedure of approximating the price of old capital by the net-of-depreciation price of new capital, as used in many articles since Bernanke et al. (1999), has profound implications when the capital depreciation rate is positive. When accounting for the appropriate price of capital, the effects of the financial accelerator are even stronger than originally assessed.
*Replication files for solving BGG with the equilibrium price of capital: download