Working Papers

Money, Inflation, and Unemployment in the Presence of Informality

This paper studies the implications of informality for the long run Phillips curve in developing economies. I present a monetary dynamic general equilibrium model with search frictions in both labor and goods markets and where informality is an equilibrium outcome. Policies that lead to a larger informal sector result in an upward shift in both the money demand relation and the Beveridge curve. In contrast, financial development reduces informality and shifts both the Beveridge curve and the money demand relation downwards. An increase in the long run inflation rate affects unemployment through two channels: On the one hand, higher inflation reduces the surplus of monetary trades which lowers firms’ profits, job creation and increases unemployment. On the other hand, it shifts firms’ hiring decision from high separation and cash intensive informal jobs to low separation formal jobs which reduces unemployment. I calibrate the model to the Brazilian economy and find that the existence of a large informal sector significantly dampens the long run effects of monetary policy on unemployment and output. This result points to the importance of accounting for informality in the conduct of monetary policy in developing economies.

A Model of Endogenous Financial Inclusion: Implications for Inequality and Monetary Policy, with Pedro Gomis-Porqueras

We propose a monetary dynamic general equilibrium model with endogenous credit market participation to study the impact of financial inclusion on welfare and inequality. We find that significant consumption inequality can result from limited access to basic financial services. In this environment, monetary policy has distributional consequences as agents face different liquidity constraints. This heterogeneity generates a pecuniary externality which can result in overconsumption of financially included agents above the socially efficient level. We conduct a quantitative assessment for the case of India. Our simple model is able to account for approximately a third of the observed consumption inequality. We analyze various policies aimed at increasing financial inclusion. As a result of pecuniary externalities, interest rate policies can result in a decrease in welfare and an increase in consumption inequality. Moreover, we find that a direct benefit transfer to bank account owners is superior to interest rate policies as it can increase welfare and reduce consumption inequality despite a decrease in individual consumption.

Work in Progress

Terms of Trade Shocks and the Labor Market in Commodity-Exporting Economies

This paper investigates the empirical and theoretical relationship between commodity terms of trade shocks and the labor market dynamics in commodity-exporting economies. I build a two-sector small open economy RBC model with labor search and reallocation frictions and a fixed commodity supply and calibrate it to Chilean data. In this model, commodity price shocks operate mainly through a pure wealth effect. The resulting movements in the real exchange rate affect the allocation of production factors between the non-commodity tradable and non-tradable sectors. Preliminary results show that search frictions and reallocation costs in the labor market contribute to the dampening of the terms of trade shock which helps in explaining the Terms of Trade disconnect raised by Schmitt-Grohe and Uribe (2016).

Monetary Policy in an Environment with Domestic and Foreign Denominated Bank Accounts, with Pedro Gomis-Porqueras and Sébastien Lotz.

We revisit the issue of dollarization by focusing on the co-existence of domestic and foreign currency denominated bank accounts and the challenge this poses to monetary policy. We build on empirical evidence stating that sellers tend to prefer payments in local currency for small transactions while they prefer foreign currency for large transactions. We use this observation to build a New Monetarist model which features equilibria with bank deposits and loans in both currencies. This setting allows us to study issues such as the benefit of allowing foreign currency denominated bank accounts, the implications on money demand and the nominal exchange rate of regulations that discriminate among assets and liabilities based on their currency denomination (e.g. differential reserve requirements).

Other Work

DSGE models for developing economies: an application to Morocco (Data, Code)