Research

Working Papers

Doing Without Nominal Rigidities: Real Effects of Monetary Policy in a Monetary World draft, short slides

Abstract: I develop a quantitative model of money as a medium of exchange, built on search frictions in the product and labor markets, which provides an alternative theory for the real effects of monetary policy. Due to matching uncertainty, firms operate below full capacity, and households carry money that ends up unused. A reduction in the nominal interest rate decreases the opportunity cost of holding money, pushing up households’ money demand. The increased liquidity carried by households results in a decrease in money velocity but an increase in capacity utilization, as it becomes easier for firms to match households with money to purchase their goods. This delivers an increase in output and employment. I estimate the model to match the impulse response functions to a stimulative monetary policy shock in a vector autoregression and compare it to a model of nominal rigidities. The search-based model’s response to the shock displays positive, persistent effects on consumption, investment, and employment. As in the data, the labor share is countercyclical, something the New Keynesian model is unable to deliver.

Informality and the Distributional Effects of Inflation and Consumption Taxes (with Daniel Jaar) draft

Abstract: Low-income households in developing countries devote a larger share of spending to informal, cash-intensive goods. As a result, consumption taxes fall more heavily on the rich, whose spending is concentrated in the taxable formal sector, while inflation falls more heavily on the poor, who rely more on cash. To quantitatively evaluate the distributional consequences of both instruments, we develop a heterogeneous-agent model with a cash-intensive informal sector and a rich description of the goods market that yields the aforementioned non-homothetic consumption patterns. Calibrated to Peru – where informality accounts for around half of economic activity – the model shows that informal purchases provide significant savings through lower prices, particularly for poor households, who save up to 11% compared to purchasing the same bundle formally. In revenue-neutral reforms that trade off inflation against consumption taxes, we uncover sharp distributional conflict: households in the bottom decile prefer an 18% consumption tax rate with 4% inflation, whereas the top decile prefers a 13% consumption tax rate with 12% inflation. The disagreement grows with the size of the informal sector.

Publications

The neutrality of nominal rates: How long is the long run? (with Valle e Azevedo and Teles) link

International Economic Review, November 2022, Volume 63, Issue 4, pages 1745-1777

Abstract: We revisit the empirical relationship between policy interest rates and inflation aimed at understanding the reasons for persistently low inflation in Japan and the euro area and why monetary policy has been unable to raise it. We document the long-run positive relationship between nominal rates and inflation across countries and across time. We also find that a permanent rise in nominal rates leads to an increase in inflation, also in the short run. These findings suggest that the low inflation outcomes are a result of policy rates being kept too low for too long.

Work in Progress

Real Monetary Policy (with Rios Rull, Takamura, and Terajima)