Research

Working Papers

Doing Without Nominal Rigidities: Real Effects of Monetary Policy in a Monetary World link

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, Inflation, and Fiscal Progressivity in Developing Countries (with Daniel Jaar) link

Abstract: The informal sector in developing economies has substantial implications for public finance. Its scale limits the effectiveness of standard tax instruments, often justifying the use of inflation as an alternative revenue source. Informality also has distributional consequences: informal businesses tend to be small, rely heavily on cash, and supply a larger share of goods to poorer households. In this paper, we present a general equilibrium model where firms decide on formality status, and households choose their consumption bundles, allowing us to examine these distributional aspects of informality. We use the model to study the trade-offs between different revenue-equivalent combinations of inflation and consumption taxes. We calibrate the model for Peru and find a notable disparity in effective tax rates across wealth levels under a benchmark 4% inflation rate and an 18% consumption tax: the bottom income quintile pays an effective tax rate equivalent to just 55% of that of the top quintile. Reducing inflation from 4% to 0% requires raising consumption taxes by 2.2 percentage points. This shift benefits the poorest 90.7% of households at the expense of the wealthiest 9.3%. This would increase the welfare of the bottom quintile by 0.25% in consumption-equivalent units, whereas the top quintile experiences a 0.01% decrease.

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)