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.
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.
(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.
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
Racial Unemployment Gap and the Disparate Impact of the Inflation Tax, with Garth Baughman and Hugo van Buggenum
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.
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.
Asset Pricing, Liquidity, and Monetary Policy, with Pedro Gomis-Porqueras, Stan Rabinovich and Hugo van Buggenum
We propose a monetary asset pricing model with multiple liquid assets and a Taylor rule to revisit the equity premium and the risk-free rate puzzles.
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 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.