A large body of cross-sectional evidence has established that cuts in the supply of bank lending affect firm outcomes and the allocation of credit. However, it is unclear what these results imply for the effect on aggregate output of a cut in aggregate bank lending. I estimate this aggregate effect using a new general equilibrium model with multibank firms, relationship banking, endogenous credit dependence, and bank market power. I use a set of cross-sectional patterns to estimate the key structural parameters of the model. The effect of an aggregate lending cut on aggregate output is large: a one percent decline in aggregate bank lending supply reduces aggregate output by 0.2 percent. The structure of labor and credit markets is important to reach this answer. Under an alternative parametrization of the model that ignores input markets frictions the response of aggregate output is three times smaller. Under my preferred parametrization, the cross-sectional effects survive aggregation in general equilibrium. Instead, with frictionless input markets the cross-sectional patterns overestimate the aggregate response by a factor of five.
with Sergio Ocampo
We study how the response of developing countries to economic policies —such as job guarantee programs, unemployment insurance, and micro-finance— depends on the prevalence of low-earning self-employed individuals, a characteristic feature of these economies. To this end, we develop a new general equilibrium occupational choice model that is consistent with the behavior and composition of self-employment. Our model differs from previous work in the central role of unemployment risk in shaping the selection of agents into self-employment. Models that rely only on financial frictions are at odds with crucial features of self-employment. These features support the prevalence of low-productivity subsistence entrepreneurs in developing economies. These low-earning self-employed play a critical role in shaping policy responses. They are willing to take on jobs at market wages, leading to a muted response of wages to labor demand shocks as in job guarantee programs. Additionally, offering small unemployment benefits drives unproductive (low-earning) agents out of self-employment, increasing productivity and output. Finally, micro-finance exacerbates the presence of low-earning self-employed agents, reducing productivity.
We study the importance of information frictions in asset markets. We develop a methodology to identify the extent of information frictions based on a broad class of models of trade in asset markets, which predict that these frictions affect the relationship between listed prices and selling probabilities. We apply our methodology to physical capital markets data, using a unique dataset on a panel of nonresidential structures listed for trade. We show that the patterns of prices and duration are consistent with the presence of asymmetric information. On the one hand, capital units that are more expensive because of their observable characteristics tend to have lower duration, as predicted by models of trading under a full information model. On the other hand, capital units that are expensive beyond their observable characteristics tend to have a longer duration, as predicted by models of trading under asymmetric information. Combining model and data, we estimate that asymmetric information can explain 21% of the +30% dispersion in price differences of units with similar observed characteristics. We quantify the effects of information frictions on allocations, prices, and liquidity, and show that the estimated degree of information frictions can to lead to 15% lower output due to low trading probabilities of high-quality capital.
The Slope of the Phillips Curve: Evidence from U.S. States (first draft soon)
We estimate the slope of the Phillips curve in the cross-section of U.S. states using newly constructed state-level price indexes for non-tradable goods back to 1978. We develop a panel-data identification approach based on tradeable demand spillovers. In contrast to recent research, we find that the Phillips curve has been if anything steeper since 1985 than it was during the Volcker disinflation. We use a multiple region model to infer the slope of the aggregate Phillips Curve from our regional estimates. We show how our findings are consistent with the behavior of aggregate inflation in the early 1980's, once aggregate inflation is measured in a consistent way going back in time. Our results suggest that the sharp drop in inflation in the early 1980s was due to shifting expectations about long-run monetary policy as opposed to a steep Phillips curve.
with Carlos Rondón Moreno
We relax the perfect information assumption in a small open economy with collateral constraints. Agents observe income growth but do not perceive whether the underlying shocks are permanent or transitory. The likelihood and severity of financial crises are increased by the interaction between the information friction and a pecuniary externality that emerges when agents use as collateral an asset valued at market prices. Due to a more significant welfare loss, the optimal tax to restore constrained efficiency is six times larger than under perfect information.
Work in Progress
The effectiveness of local fiscal policies in a monetary union depends on the reaction of prices. We estimate the pass-through of local sale taxes to prices using data underlying the CPI. We estimate a higher pass-through of sale taxes on tradeable goods relative to non-tradeable goods. We use a New Keynesian model where regions trade and consume tradeable and non-tradeable goods to interpret the evidence. In the model, the pass-through of a sale tax depends on the extent of geographical competition for a good. We explore conditions under which fiscal policies are output and welfare-improving.