Sustainable Growth Research
International finance, Macroeconomics, and Climate risk
2023-32 | with Carvalho, Ferrero, and Mazin | November 2023
We explore the implications of demographic trends for the evolution of real interest rates across countries and over time. To that end, we develop a tractable three-country general equilibrium model with imperfect capital mobility and country-specific demographic trends. We calibrate the model to study how low-frequency movements in a country’s real interest rate depend on its own and other countries’ demographic factors, given a certain degree of financial integration. The more financially integrated a country is, the higher the sensitivity of its real interest rate to global developments is, and the less its own real rate determinants matter. We then estimate panel error correction models relating real interest rates to many of its possible determinants-demographics included-imposing some restrictions motivated by lessons from our structure model. Results corroborate the importance of accounting for time-varying financial integration, and show global factors and life expectancy are relevant determinants of real interest rates.
2023-02 | with Hale and Leer | January 2023
Fiscal support measures in response to the COVID-19 pandemic varied in their targeted beneficiaries. Relying on variability across 10 large economies, we study differences in the inflationary effects of fiscal support measures targeting consumers or businesses. Because conventional measures of real activity were distorted, we control for the underlying state of real economy using households sentiment data. We find that fiscal support measures to consumers, but not firms, had inflationary effects that manifested 5 weeks following the announcement and peaked at 12 weeks. The magnitude of the effect was larger in an environment of improving consumer sentiment.
2016-06 | with Carvalho and Hsu | December 2016
The Zero Lower Bound (ZLB) on interest rates is often regarded as an important constraint on monetary policy. To assess how the ZLB affected the Fed’s ability to conduct policy, we estimate the effects of Fed communication on yields of different maturities in the pre-ZLB and ZLB periods. Before the ZLB period, communication affects both short and long-dated yields. In contrast, during the ZLB period, the reaction of yields to communication is concentrated in longer-dated yields. Our findings support the view that the ZLB did not put such a critical constraint on monetary policy, as the Fed retained some ability to affect long-term yields through communication.
2014-17 | with Carvalho and Yao | April 2019
We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence – policy inertia or persistent policy shocks – is key. In the presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate persistence, hampering the ability of sticky-price models to generate persistent real exchange rate deviations from parity.
2013-32 | with Daly, Fernald, and Jorda | July 2017
The manner firms respond to shocks reflects fundamental features of labor, capital, and commodity markets, as well as advances in finance and technology. Such features are integral to constructing models of the macroeconomy. In this paper we document secular shifts in the margins firms use, in aggregate, to adjust to shocks that have consequences for the economy’s cyclical behavior. These new business cycle facts on the comovement of output and its inputs are a natural complement to analyzing output and its expenditure components. Our findings shed light on the changing cyclicality of productivity in response to different shocks.
2012-08 | with Carvalho | July 2012
The standard argument for abstracting from capital accumulation in sticky-price macro models is based on their short-run focus: over this horizon, capital does not move much. This argument is more problematic in the context of real exchange rate (RER) dynamics, which are very persistent. In this paper we study RER dynamics in sticky-price models with capital accumulation. We analyze both a model with an economy-wide rental market for homogeneous capital, and an economy in which capital is sector specific. We find that, in response to monetary shocks, capital increases the persistence and reduces the volatility of RERs. Nevertheless, versions of the multi-sector sticky-price model of Carvalho and Nechio (2011) augmented with capital accumulation can match the persistence and volatility of RERs seen in the data, irrespective of the type of capital. When comparing the implications of capital specificity, we find that, perhaps surprisingly, switching from economy-wide capital markets to sector-specific capital tends to decrease the persistence of RERs in response to monetary shocks. Finally, we study how RER dynamics are affected by monetary policy and find that the source of interest rate persistence – policy inertia or persistent policy shocks – is key.
2010-26 | September 2014
Using the Survey of Consumer Finances data about individual stocks ownership, I compare households’ decision to invest in domestic versus foreign stocks. The data show that information plays a larger role in households’ decision to enter foreign stock markets. Households that invest in foreign stocks are more sophisticated in their sources of information – they use the Internet more often as a main source of information, talk to their brokers, trade more frequently, and shop more for investment opportunities. Adding to the wedge between the two groups of investors, foreign stock owners are also substantially wealthier, more educated, and less risk averse than households who focus on domestic stocks only. Furthermore, ownership of foreign stocks increases if the household is headed by women.
wp10-26bk-appendix.pdf – Appendix
Published Articles (Refereed Journals and Volumes)
Forthcoming in Brookings Papers on Economic Activity | with Carvalho
We review two previous bouts of high inflation and disinflation since Brazil adopted inflation targeting. In both episodes, fiscal sustainability concerns were present and inflation expectations became unanchored despite substantial monetary policy tightening. Disinflation and the re-anchoring of expectations took time and proved costly, as both episodes entailed a recession. They required tight monetary policy combined with critical shifts toward structural economic reforms and sound fiscal policy. The ongoing episode features the same fiscal concerns and unanchored inflation expectations. This suggests the path ahead for disinflation will be challenging, unless policies change direction. We also speculate whether the Brazilian experience can provide insights for other countries.
European Economic Review 156(104474), July 2023 | with Jorda
Following the worst of the COVID-19 pandemic, inflation surged to levels last seen
in the 1980s. Motivated by vast differences in pandemic support across countries, we
investigate the subsequent response of inflation and its feedback to wages. We exploit
the differences in pandemic support to identify the effect that these programs had on
inflation and the passthrough to wages. Our empirical approach focuses on a novel
dynamic difference-in-differences method based on local projections. Our estimates
suggest that an increase of 5 percentage points in direct transfers (relative to trend)
translates into about a peak 3 percentage points boost to inflation and wage growth.
Moreover, higher inflation accentuates the role of inflation expectations on wage-setting
Journal of Monetary Economics 124, November 2021, 140-154 | with Carvalho and Tristao
Ordinary Least Squares (OLS) estimation of monetary policy rules produces potentially inconsistent estimates of policy parameters. The reason is that central banks react to variables, such as inflation and the output gap, that are endogenous to monetary policy shocks. Endogeneity implies a correlation between regressors and the error term — hence, an asymptotic bias. In principle, Instrumental Variables (IV) estimation can solve this endogeneity problem. In practice, however, IV estimation poses challenges, as the validity of potential instruments depends on various unobserved features of the economic environment. We argue in favor of OLS estimation of monetary policy rules. To that end, we show analytically in the three-equation New Keynesian model that the asymptotic OLS bias is proportional to the fraction of the variance of regressors due to monetary policy shocks. Using Monte Carlo simulations, we then show that this relationship also holds in a quantitative model of the U.S. economy. Since monetary policy shocks explain only a small fraction of the variance of regressors typically included in monetary policy rules, the endogeneity bias tends to be small. For realistic sample sizes, OLS outperforms IV. Finally, we estimate a standard Taylor rule on different subsamples of U.S. data and find that OLS and IV estimates are quite similar.
Journal of International Economics 130(103448), May 2021 | with Hobijn and Shapiro
Using price quote data that underpin the official U.K. consumer price index (CPI), we analyze the effects of the unexpected passing of the Brexit referendum to the dynamics of price adjustments. The sizable depreciation of the British pound that immediately followed Brexit works as a quasi-experiment, enabling us to study the transmission of a large common marginal cost shock to inflation as well as the distribution of prices within granular product categories. A large portion of the inflationary effect is attributable to the size of price adjustments, implying that a time-dependent price-setting model can match the response of aggregate inflation reasonably well. The state-dependent model fares better in capturing the endogenous selection of price changes at the lower end of the price distribution, however, it misses on the magnitude of the adjustment conditional on selection.
In BIS Papers: Financial Market Development, Monetary Policy and Financial Stability in Emerging Market Economies, 113 | Bank for International Settlements, 2020. 55-65 | with Barroso
Financial market development affects financial intermediaries, corporations and households, setting the grounds on how these agents can act in the economy. Brazil’s
comprehensive reform agenda in recent years has promoted the deepening of credit markets, with households and corporations gaining increased access to credit
domestically. These developments have a wide range of implications for monetary policy transmission and financial stability.
In Chapter 7, Changing Inflation Dynamics, Evolving Monetary Policy (Volume 27), ed. by G. Castex, J. Gali and D. Saravia | Santiago: Central Bank of Chile, 2020. 269-316 | with Jorda
The Phillips curve remains central to stabilization policy. Increasing financial linkages, international supply chains, and managed exchange rate policy have given core currencies an outsized influence on the domestic affairs of world economies. We exploit such influence as a source of exogenous variation to examine the effects of the recent financial crisis on the Phillips curve mechanism. Using a difference-in-differences approach, and comparing countries before and after the 2008 financial crisis sorted by whether they endured or escaped the crisis, we are able to assess the evolution of the Phillips curve globally.
Journal of the European Economic Association 17(3), April 2018, 799-833 | with Hobijn
We estimate the upper-level elasticity of substitution between goods and services of a nested aggregate CES preference specification. We show how this elasticity can be derived from the long-run response of the relative price of a good to a change in its VAT rate. We estimate this elasticity using new data on changes in VAT rates across 74 goods and services for 25 E.U. countries from 1996 through 2015. Depending on the level of aggregation, we find a VAT pass-through rate between 0.4 and 0.7. This implies an upper-level elasticity of 3, at the lowest level of aggregation with 74 categories, and 1(Cobb-Douglas preferences) at a high level of aggregation that distinguishes 10 categories
of goods and services.
Economics Letters 163, 2018, 193-196 | with Carvalho
A three-sector model with a suitably chosen distribution of price stickiness can closely approximate the response to aggregate shocks of New Keynesian models with a much larger number of sectors, allowing for their estimation at much reduced computational cost.
wp2017-12_appendix.pdf – Supplement
Review of Economic Dynamics 22, October 2016, 208-222 | with Carvalho
We develop a multisector model in which capital and labor are free to move across firms within each sector, but cannot move across sectors. To isolate the role of sectoral specificity, we compare our model with otherwise identical multisector economies with either economy-wide or firm-specific factor markets. Sectoral factor specificity generates within-sector strategic substitutability and tends to induce across-sector strategic complementarity in price setting. Our model can produce either more or less monetary non-neutrality than those other two models, depending on parameterization and the distribution of price rigidity across sectors. Under the empirical distribution for the U.S., our model behaves similarly to an economy with firm-specific factors in the short-run, and later on approaches the dynamics of the model with economy-wide factor markets. This is consistent with the idea that factor price equalization might take place gradually over time, so that firm-specificity may serve as a reasonable short-run approximation, whereas economy-wide markets are likely a better description of how factors of production are allocated in the longer run.
European Economic Review 88, September 2016, 208-226 | with Carvalho and Ferrero
The demographic transition can affect the equilibrium real interest rate through three channels. An increase in longevity-or expectations thereof-puts downward pressure on the real interest rate, as agents build up their savings in anticipation of a longer retirement period. A reduction in the population growth rate has two counteracting effects. On the one hand, capital per-worker rises, thus inducing lower real interest rates through a reduction in the marginal product of capital. On the other hand, the decline in population growth eventually leads to a higher dependency ratio (the fraction of retirees to workers). Because retirees save less than workers, this compositional effect lowers the aggregate savings rate and pushes real rates up. We calibrate a tractable life-cycle model to capture salient features of the demographic transition in developed economies, and find that its overall effect is a reduction of the equilibrium interest rate by at least one and a half percentage points between 1990 and 2014. Demographic trends have important implications for the conduct of monetary policy, especially in light of the zero lower bound on nominal interest rates. Other policies can offset the negative effects of the demographic transition on real rates with different degrees of success.
Journal of Monetary Economics 66, September 2014, 108-123 | with Carvalho
We combine questions from the Michigan Survey about future inflation, unemployment, and interest rates to investigate whether households are aware of the basic features of U.S. monetary policy. Our findings provide evidence that some households form their expectations in a way that is consistent with a Taylor (1993)-type rule. We also document a large degree of variation in the pattern of responses over the business cycle. In particular, the negative relationship between unemployment and interest rates that is apparent in the data only shows up in households’ answers during periods of labor market weakness.
National Institute Economic Review 228, May 2014, R58-R64 | with Daly, Fernald, and Jorda
This note examines labor market performance across countries through the lens of Okun’s Law. We find that after the 1970s but prior to the global financial crisis of the 2000s, the Okun’s Law relationship between output and unemployment became more homogenous across countries. These changes presumably reflected institutional and technological changes. But, at least in the short term, the global financial crisis undid much of this convergence, in part because the affected countries adopted different labor market policies in response to the global demand shock.
American Economic Review 101(6), October 2011, 2391-2424 | with Carvalho
We study the purchasing power parity (PPP) puzzle in a multi-sector, two-country, sticky-price model. Across sectors, firms differ in the extent of price stickiness, in accordance with recent microeconomic evidence on price setting in various countries. Combined with local currency pricing, this leads sectoral real exchange rates to have heterogeneous dynamics. We show analytically that in this economy, deviations of the real exchange rate from PPP are more volatile and persistent than in a counterfactual one-sector world economy that features the same average frequency of price changes, and is otherwise identical to the multi-sector world economy. When simulated with a sectoral distribution of price stickiness that matches the microeconomic evidence for the U.S. economy, the model produces a half-life of deviations from PPP of 39 months. In contrast, the half-life of such deviations in the counterfactual one-sector economy is only slightly above one year. As a by-product, our model provides a decomposition of this difference in persistence that allows a structural interpretation of the different approaches found in the empirical literature on aggregation and the real exchange rate. In particular, we reconcile the apparently conflicting findings that gave rise to the “PPP Strikes Back debate” (Imbs et al. 2005a,b and Chen and Engel 2005).
sr351.html – Earlier version, issued as Federal Reserve Bank of New York Staff Report 351 (October 2008)
Economic Letter 2023-27 | October 16, 2023 | with Arnaut and Jorda
Economic Letter 2022-25 | September 6, 2022 | with Jorda, C Liu, and Rivera-Reyes
Economic Letter 2022-07 | March 28, 2022 | with Jorda, C Liu, and Rivera-Reyes
Economic Letter 2019-20 | August 5, 2019 | with Gerstein, Hobijn, and Shapiro
Economic Letter 2019-19 | July 15, 2019 | with Jorda, Marti, and Tallman
Economic Letter 2019-07 | February 25, 2019 | with Hale, Hobijn, and D. Wilson
Economic Letter 2019-05 | February 11, 2019 | with Jorda, Marti, and Tallman
Economic Letter 2019-01 | January 7, 2019 | with Hale, Hobijn, and D. Wilson
Economic Letter 2017-27 | September 25, 2017 | with Carvalho and Ferrero
Economic Letter 2016-37 | December 19, 2016 | with Wilson
Economic Letter 2016-33 | November 7, 2016 | with Rudebusch
Economic Letter 2016-26 | September 6, 2016 | with Regan
Economic Letter 2016-22 | July 18, 2016 | with Bevilaqua
Economic Letter 2016-21 | July 11, 2016 | with Carvalho and Hsu
FRBSF 2015 Annual Report | Feb 2016 | with Liu and Spiegel
Economic Letter 2015-22 | July 6, 2015 | with Daly and Pyle
Economic Letter 2015-11 | April 6, 2015
Economic Letter 2014-36 | December 1, 2014 | with Bosler and Daly
Economic Letter 2014-18 | June 23, 2014 | with Carvalho
Economic Letter 2014-12 | April 21, 2014 | with Daly, Fernald, and Jorda
Economic Letter 2014-06 | March 3, 2014
Economic Letter 2013-38 | December 23, 2013 | with Daly, Fernald, and Jorda
Economic Letter 2012-23 | August 6, 2012 | with Hale
Economic Letter 2012-17 | June 4, 2012 | with Hale and Marks
Economic Letter 2012-06 | February 27, 2012 | with Malkin
Economic Letter 2011-18 | June 13, 2011
Economic Letter 2011-07 | March 7, 2011
Economic Letter 2010-33 | November 1, 2010
Opening lecture 2021, Economics Department, PUC-Rio (in Portuguese), 2021
Monetary Policy and Central Banking in Covid Era, 2021 | with Serra Fernandes
Covid-19 has brought severe economic consequences for the global economy. Worldwide, fiscal and monetary authorities responded with unprecedented measures providing lifelines to households and firms, as well as safeguarding the well-functioning of credit and financial markets. Banco Central do Brasil lowered its policy rate to a record low level and implemented measures to increase liquidity and ease capital requirements. The government implemented a sizable income transfer program and several credit programs targeting small and medium businesses, among other initiatives. Brazil recovered strongly in the second half of 2020 and should continue its path to recovery as the health crisis recedes.
Speech, Banco Centro do Brasil, 2020
Interview, Network for Greening the Financial System, June 2020
In Driving Diversity, Gender Balance Index | Official Monetary and Financial Institutions Forum, 2020. 15
VoxLacea, April 29, 2014, LSE-USAppm, May 19, 2014 | with Carvalho
do-people-understand-monetary-policy – Vox.LACEA