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Working Paper
Redistributive Fiscal Policies and Business Cycles in Emerging Economies
Government expenditures are pro-cyclical in emerging markets and counter-cyclical in developed economies. We show this pattern is driven by differences in social transfers. Transfers are more counter-cyclical and comprise a larger portion of spending in developed economies compared to emerging. In contrast, government expenditures on goods and services are quite similar across the two. In a small open economy model, we find disparate social transfer policies can account for more than a half of the excess volatility of consumption relative to output in emerging economies. We analyze how ...
Working Paper
Information Acquisition and the Finance-Uncertainty Trap
Using novel measures of information acquisition, we document causal evidence of a feedback loop between firms’ credit access and information acquisition. To examine the macroeconomic implications of this feedback loop, we develop a tractable general equilibrium framework with financial frictions and endogenous information acquisition. In line with the empirical evidence, the model predicts that a rise in information costs raises the level of uncertainty and reduces a firm’s equity value, hampering its credit access. On the other hand, tightened credit constraints restrain activity of ...
Working Paper
Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach
We develop a new approach to estimating DSGE models with occasionally binding borrowing constraints and apply it to Mexico’s business cycle and financial crisis history. We propose a new endogenous regime-switching specification of the borrowing constraint, develop a general perturbation method to solve the model, and estimate it using Bayesian methods. The estimated model fits the data with well-behaved shocks, identifying three crisis episodes of varying duration and intensity: the early-1980s Debt Crisis, the mid-1990s Tequila Crisis, and the late-2000s Global Financial Crisis. The ...
Working Paper
Evaluating Macroeconomic Outcomes Under Asymmetries: Expectations Matter
Asymmetries play an important role in many macroeconomic models. We show that assumptions on household and firm expectations play a key role in determining the effects of these asymmetries on macroeconomic outcomes. If households and firms have perfect foresight and hence do not account for the possibility of future shocks, then the implied longer-run averages and distributions for unemployment and inflation can differ significantly from their rational expectations counterparts. We first derive this result analytically under either an asymmetric monetary policy rule or a nonlinear Phillips ...
Working Paper
Nowcasting Business Cycles: a Bayesian Approach to Dynamic Heterogeneous Factor Models
We develop a framework for measuring and monitoring business cycles in real time. Following a long tradition in macroeconometrics, inference is based on a variety of indicators of economic activity, treated as imperfect measures of an underlying index of business cycle conditions. We extend existing approaches by permitting for heterogenous lead-lag patterns of the various indicators along the business cycles. The framework is well suited for high-frequency monitoring of current economic conditions in real time - nowcasting - since inference can be conducted in presence of mixed frequency ...
Working Paper
Okun Revisited: Who Benefits Most from a Strong Economy
Previous research has shown that the labor market experiences of less advantaged groups are more cyclically sensitive than the labor market experiences of more advantaged groups; in other words, less advantaged groups experience a high-beta version of the aggregate fluctuations in the labor market. For example, when the unemployment rate of whites increases by 1 percentage point, the unemployment rates of African Americans and Hispanics rise by well more than 1 percentage point, on average. This behavior is observed across other labor-market indicators, and is roughly reversed when the ...
Working Paper
A Dynamic Factor Model of the Yield Curve as a Predictor of the Economy
In this paper, we propose an econometric model of the joint dynamic relationship between the yield curve and the economy to predict business cycles. We examine the predictive value of the yield curve to forecast future economic growth as well as the beginning and end of economic recessions at the monthly frequency. The proposed nonlinear multivariate dynamic factor model takes into account not only the popular term spread but also information extracted from the level and curvature of the yield curve and from macroeconomic variables. The nonlinear model is used to investigate the ...
Working Paper
Accounting for Productivity Dispersion over the Business Cycle
This paper presents accounting decompositions of changes in aggregate labor and capital productivity. Our simplest decomposition breaks changes in an aggregate productivity ratio into two components: A mean component, which captures common changes to firm factor productivity ratios, and a dispersion component, which captures changes in the variance and higher order moments of their distribution. In standard models with heterogeneous firms and frictions to firm input decisions, the dispersion component is a function of changes in the second and higher moments of the log of marginal revenue ...
Working Paper
Imperfect Information and Slow Recoveries in the Labor Market
The unemployment rate remains elevated long after recessions, a persistence that standard search-and-matching models cannot explain. I show that noise shocks—expectational errors due to the noise in received signals about aggregate shocks—account for much of this sluggishness. Using a structural VAR, I find that absent noise shocks unemployment would have recovered to its pre-recession level six quarters earlier over 1968–2019. To interpret this evidence, I develop a search-and-matching model with on-the-job search, endogenous search effort, and wage rigidity. Embedding imperfect ...
Working Paper
Firm Dynamics and the Origins of Aggregate Fluctuations
What drives aggregate fluctuations? I test the granular hypothesis, according to which the largest firms in the economy drive aggregate dynamics, by estimating a dynamic factor model with firm-level data and controlling for the propagation of firm-level shocks using multi-firm growth model. Each time series, the growth rate of sales of a specific firm, is decomposed in an unobserved common macroeconomic component and in a residual that I interpret as an idiosyncratic firm-level component. The empirical results suggest that, once I control for aggregate shocks, idiosyncratic shocks do not ...