Research

Published Papers

Nonlinear Unemployment Effects of the Inflation Tax, with Garth Baughman, Stan Rabinovich and Hugo van Buggenum, European Economic Review (2022)

Long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. We show this using a standard monetary search model with two shocks – productivity and monetary – and frictions in both labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it more sensitive to both productivity shocks and further increases in inflation. We calibrate the model to match key aspects of the US labor market and monetary data. The calibrated model is consistent with a number of empirical correlations, which we document using panel data from the OECD: (1) there is a positive long-run relationship between anticipated inflation and unemployment; (2) there is also a positive correlation between anticipated inflation and unemployment volatility; (3) the long-run inflation-unemployment relationship is stronger when unemployment is higher. The key mechanism through which the model generates these results is the negative effect of inflation on measured output per worker, which is likewise consistent with cross-country data. Finally, we show that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate uncertainty.

A Model of Endogenous Financial Inclusion: Implications for Inequality and Monetary Policy, with Pedro Gomis-Porqueras, Journal of Money, Credit and Banking (2021)

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

Racial Unemployment Gap and the Disparate Impact of the Inflation Tax, with Garth Baughman and Hugo van Buggenum (under review)

We study the nonlinearities present in a standard labor search model with two groups of workers facing exogenous differences in the job finding and separation rates. We then use a monetary version of the model to study the racial unemployment gap between Black and white workers in the US and the disparate impact of the inflation tax on the two groups.

Intermediation and Monetary Policy in a Dollarized Economy, with Pedro Gomis-Porqueras and Sébastien Lotz (new draft coming soon)

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.

Informality, Frictional Markets and Monetary Policy

(Winner of the Young Researchers’ prize at the Economics of Informality conference 2020, organized by Universidad del Rosario and the Central Bank of Colombia)

This paper studies the long run implications of monetary policy on unemployment, output and tax revenues in economies with a large informal sector. I present a monetary model with frictional labor and goods markets and where informality is an equilibrium outcome. Multiple stationary equilibria can exist due to the strategic complementarity between households’ demand for money and firms’ entry and formalization decisions. I show that unemployment and informality are negatively correlated across these equilibria. In the long run, higher inflation and nominal interest rates lower the demand for money which reduces informality at the cost of higher unemployment. The net effect on the formal sector and tax revenues is ambiguous. I calibrate 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 simulate the long run effects of inflation under various government balanced-budget rules. When the additional seigniorage income is used to ease the tax burden on formal firms, higher inflation leads to a reduction in informality and unemployment while increasing the size of the formal sector.

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

Asset Safety and Liquidity over the Business Cycle, with Pedro Gomis-Porqueras, Stan Rabinovich and Hugo van Buggenum

We decompose the convenience yield on U.S. Treasury bonds into safety and liquidity premia and document a positive relationship with unemployment over the business cycle. This counter-cyclical pattern persists after controlling for monetary policy, the supply of treasuries and economic uncertainty. In addition, the safety premium is much more volatile than the liquidity premium especially during recessions. We propose a real business cycle model with labor search frictions, liquid assets and corporate default to rationalize these findings. We carefully calibrate the model to U.S. data and show that it generates endogenous fluctuations in both the safety and liquidity premia on treasuries in line with the data.

Informality, Dollarization and Optimal Policy, with Tsuyoshi Nakano and Stan Rabinovich.

We study optimal Ramsey policy in terms of inflation and a consumption tax in a monetary search model with tax evasion and two competing currencies: a domestic currency and a foreign one. We characterize the Ramsey equilibrium and calibrate the model to a set of countries. We show that using only variations in institutional quality, a proxy for state capacity to enforce taxes, the calibrated model is able to replicate several features of cross-country data.

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

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 discuss its general equilibrium effects on the unbanked.

Optimal Monetary Policy under Downward Nominal Wage Rigidity with Lukas Altermatt and Stan Rabinovich

We study the welfare implications of long run inflation in a standard monetary search model augmented with 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.

Other Work

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