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

Abstract: We develop a dynamic general equilibrium model with heterogeneous households and a cash-intensive informal sector that replicates two empirical patterns: the negative relationship between informality and firm productivity, and the declining share of informal consumption with household wealth. The non-homotheticity of informal consumption implies that tax incidence is heterogenous: poor households pay less consumption taxes but are more exposed to inflation. We use the model to study the distributional effects of financing government revenue through seigniorage versus consumption taxes. 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. The model also uncovers substantial variation in preferences over revenue-neutral combinations of inflation and consumption taxes: households in the top expenditure decile would like inflation to be as high as 12%, while those in the bottom favor inflation below 5%. This 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)