Abstract
We study the welfare and macroeconomic implications of simple and implementable fiscal policy rules in commodity-dependent economies, where a large share of output, exports, and government revenues depends on exogenous and volatile commodity prices. Using a multi-sector New Keynesian model estimated for the Chilean economy, we find that the welfare-maximizing fiscal policy involves an actively countercyclical response to the tax revenue cycle and an acyclical response to the commodity revenue cycle. Compared to a benchmark acyclical policy, the optimized rule reduces macroeconomic (GDP growth) volatility while delivering welfare gains of 0.6% of lifetime consumption for the average household (1.2% for hand-to-mouth households). Government consumption and especially public investment are particularly helpful in stabilizing GDP, while targeted social transfers are essential to smooth the consumption of financially constrained households. Implementing the optimized rule requires moderate additional volatility (fiscal activism) in government spending and public debt.
Abstract
I study the firm-level dynamic response of a commodity-exporting economy to global cycles in commodity prices. I propose a heterogeneous-firms model endogenizing manufacturing productivity slowdowns through reallocation toward less productive firms. Within a given sector, commodity booms reallocate market share away from exporters because of currency appreciation and away from capital-intensive firms because of the increase in the required rate of return to capital. Using microdata for Chile, the largest copper producer worldwide, I provide empirical evidence for these channels. When fed with the commodity super-cycle of 2004-2012, the calibrated model generates between 13% to 32% of the observed productivity slowdown.
Abstract
While there is widespread evidence of increasing markups in the United States and other developed economies in the last several decades, little is known about that evolution in developing economies, particularly Latin American countries. Using a harmonized dataset on listed firms from 70 countries in the period 2000-2022, I document four stylized facts about market power—measured as price-cost markups—in the six largest Latin American economies from a worldwide perspective. First, average markups in LAC are high relative to other emerging and developed economies, although they have slightly declined from prevailing levels during the commodity boom period. Second, aggregate markup dynamics are primarily driven by already high-markup firms in the top decile of the markup distribution, with little changes in the market power measured for the remaining nine deciles. Third, in contrast to the prediction of most theories about endogenously variable markups, I document a nonlinear relationship between firm-level markups and size, which is significantly negative for most of the size distribution and significantly positive for very large corporations. Fourth, the relationship between markups and investment depends heavily on the markup level. For a typical firm with median market power, a 1% increase in its markup implies a 0.86% rise in the investment rate. In contrast, for firms at the 99th percentile of the markup distribution, a 1% increase in its markup implies a -0.44% reduction in investment.
Abstract
Singapore's unique monetary policy consists of a managed exchange rate framework that can be characterized as a Taylor-like reaction function with the nominal devaluation rate instead of the nominal interest rate as the main policy instrument. We build a small open economy New Keynesian model to estimate and characterize such a monetary rule from a welfare perspective. Welfare gains under an exchange rate rule (ERR) relative to the more standard interest rate-based Taylor rule (IRR) are unambiguously increasing in the degree of trade openness (defined as exports plus imports as a share of GDP). For Singapore, where trade openness is 280% of GDP, we estimate welfare gains of 1.48% of permanent consumption under an ERR. In a counterfactual thought experiment, we find that Chile, an established inflation-targeting economy using an IRR, would be better off under an ERR for any degree of openness above 100% (currently at 70%).
Abstract
The COVID-19 pandemic provoked a sharp rise in debt and economic uncertainty. We analyze the impacts of debt and risk on individual firm investment by employing a sample of 30,000 firms across 46 advanced and emerging economies. At greater distance to default, debt has a positive or no impact on investment but at higher levels of risk, negative effects are pronounced. Economic crises deepen the debt overhang, and the impacts are persistent. Given current levels of debt and risk, investment may remain subdued, weakening economic growth.
Abstract
The Great Recession spurred a new wave of models with financial frictions aimed to understand the role of the financial sector in amplifying the original mortgage shock. Most of these models, however, can be mapped into prototype economies with “agnostic” intertemporal wedges, which are deemed to be not promising to explain U.S. business cycles (Chari, Kehoe, and McGrattan, 2007; CKM). Was this time different? Is this new wave of models well-suited to quantitatively account for the so-called financial crisis? To answer these questions, I augment a real business cycle model with financial intermediaries that face an endogenously determined balance-sheet constraint (Gertler and Karadi, 2011; GK). To capture the intrinsic nonlinear nature of the crisis and to give the friction the best chance to play a role, I allow for the financial constraint to bind only occasionally. This way I capture the idea of infrequent financial crises nested within typical business cycles without relying on unrealistically large shocks. I show that the model with microfounded friction is equivalent to a prototype economy with an (exogenous) intertemporal investment wedge, which is a function of the key endogenous variables associated with the friction in the baseline model. Consistent with CKM, I confirm that these types of frictions are unimportant to account for U.S. macroeconomic fluctuations over the five decades before the crisis. More surprisingly, I show that the CKM result is robust to (a) the extension to the Great Recession period, (b) the introduction of a nonlinear framework able to switch between "tranquil times" and financial crises, (c) the solution and filtering of structural shocks using nonlinear techniques, and (d) the introduction of spread data to inform the model about the severity of the friction.
Abstract
I estimate a long-run relationship between the real exchange rate (RER) and a set of underlying fundamentals using panel cointegration techniques for a sample of 45 countries. Unlike other studies, I found strong evidence for the Balassa-Samuelson effect for the complete set of economies and subsets of developed and developing countries. The size and significance of the Balassa-Samuelson effect are robust to the inclusion of a series of other long-run drivers of the real exchange rate, in particular, the terms of trade, the net foreign asset position, the level of government spending, and the degree of trade openness. I further estimate an error correction model for the growth rate of the RER, which sheds light on the purchasing power parity (PPP) puzzle. In particular, the model predicts significant short-run dynamics of the RER, which, at the same time, is consistent with a high degree of persistence of its deviations from the long-run cointegrating relationship.