Working Papers

Informality and the Long Run Phillips Curve

I examine in a theoretical model the long run relationship between inflation, output and unemployment in the presence of a large informal sector. I find that an increase in the long run inflation rate has two opposing effects. First, it taxes money-intermediated economic activity and hence lowers the creation of jobs in both the formal and informal sectors and increases unemployment. Second, as the informal sector is more cash intensive, an increase in inflation shifts the creation of jobs from the informal to the formal sector. Since formal jobs have a lower separation rate, this labor reallocation reduces unemployment. Numerical results show that informality significantly dampens the long run effects of monetary policy on unemployment and output.

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. We also uncover a pecuniary externality which can result in overconsumption of financially included agents above the socially efficient level. Finally, we analyze various policies aimed at increasing financial inclusion and find that a direct benefit transfer to bank account owners is superior to interest rate policies.

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 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).

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)