Accepted and Published Papers

A Model of Endogenous Financial Inclusion: Implications for Inequality and Monetary Policy, with Pedro Gomis-Porqueras, Journal of Money, Credit and Banking (Accepted, 2019)

We propose a monetary model with endogenous credit market participation to study the impact of financial inclusion on inequality and welfare. We find that consumption inequality results from differences in agents’ decision to access financial services. This heterogeneity generates a pecuniary externality, potentially resulting in some agents over-consuming. Moreover, monetary policy has distributional consequences. To quantify these effects, we calibrate our model to India, accounting for a third of observed consumption inequality. Finally, we analyze various policies aimed at increasing financial inclusion and find that a direct transfer to bank account holders yields the highest welfare and lowest consumption inequality.

Working Papers

Informality, Frictional Markets and Monetary Policy (job market paper, new draft coming soon)

This paper studies informality, market frictions and monetary policy in developing economies. I present a monetary model with frictional labor and goods markets and where informality is an equilibrium outcome. Policies that lead to a larger informal sector result in an increase in money demand and an upward shift in the Beveridge curve. In contrast, financial development reduces informality and money demand and shifts the Beveridge curve downwards. An increase in inflation and the nominal interest rate results in size and composition effects: On the one hand, it reduces the surplus of monetary trades which lowers firms’ profits, job creation and increases unemployment. On the other hand, it shifts firms activity from the informal to the formal sector. The latter effect has implications for tax revenues and can dampen the rise in unemployment when informal jobs have a higher separation rate. I calibrate a stochastic version of the model to the Brazilian economy and find that the observed downward trend in the nominal interest rate implies a moderate fall in unemployment and an increase in the size of the informal sector. I also provide results for the cost of inflation and discuss several extensions.

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

In this paper I investigate the empirical and theoretical relationship between commodity terms of trade shocks and the dynamics of the labor market in commodity-exporting economies. Commodity price shocks operate mainly through the wealth channel. The resulting movements in the real exchange rate affect the allocation of production factors between the non-commodity tradable and non-tradable sectors. I show that labor search and matching frictions contribute to the dampening of the shock which helps explain the Terms of Trade disconnect discussed in the literature. I also show numerically that the fundamental surplus fraction matters for the transmission of the shocks to unemployment.

Work in Progress

Monetary Policy and the Unbanked: Consequences for Stabilization, with Pedro Gomis-Porqueras and Christopher Waller.

We study stabilization policy in a monetary DSGE model where a proportion of the population doesn’t have access to bank accounts. The Central Bank implements monetary policy through a standing facility and commits to partially reverse its short-run interventions to maintain the long-run inflation target. We characterize the state-dependent optimal stabilization policy and show that it can reduce the welfare of the unbanked through a general equilibrium effect.

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. We then use it 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).

Optimal Monetary Policy under Downward Nominal Wage Rigidity with Lukas Altermatt

We study the welfare implications of long run inflation in a monetary DSGE model with labor search frictions and downward nominal wage rigidity. We explore the trade-off between the real balance effect of inflation and its role in relaxing the downward constraint on nominal wages.

Segmented Markets and Monetary Policy in Developing Economies

I study the effects of market segmentation on the short run transmission of monetary policy in developing economies. The focus here is on segmentation of the economy between formal and informal sectors and limited participation in financial markets. Monetary policy operates through open market operations in the formal financial market which affects directly only the formal part of the economy. It then propagates gradually to the informal sector through transactions between formal and informal agents in the goods and labor markets. The speed and extent of this propagation depends on interlinkages between the two sectors of the economy.

Other Work

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