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WORKING PAPERS

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How Do Central Banks Control Inflation? A Guide For the Perplexed with Ricardo Reis

July 2024 [pdf] [online appendix] Revise & Resubmit at Journal of Economic Literature

Central banks have a primary goal of price stability. They pursue it using tools that include the interest they pay on reserves, the size and the composition of their balance sheet, and the dividends they distribute. We describe the economic theories that justify the central bank’s ability to control inflation and discuss their relative effectiveness, in light of both theory and the historical record. We present alternative approaches as consistent with each other, as opposed to conflicting ideological camps. While interest-rate setting is often superior, having both a monetarist pillar and fiscal support is essential, and at times pegging the exchange rate or monetizing the debt is inevitable.

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Sudden Stops, Productivity, and the Exchange Rate 

October 2020 [pdf] [online appendix] Reject & Resubmit at American Economic Review

Following a sudden stop, real exchange rates can adjust through a nominal exchange rate depreciation, lower domestic prices, or a combination of both. This paper makes three contributions to understand how the type of adjustment shapes the response of macroeconomic variables, in particular productivity, to such an episode. First, using Spanish micro data during two episodes, it documents that in a currency union unproductive firms exit more than in a floating regime. Second, it proposes a small open economy DSGE model featuring firm selection, variable markups and elastic labor supply to rationalize this finding. The model nests three mechanisms through which a sudden stop affects productivity: a pro-competitive, a cost, and a demand channel. While only the former operates when the nominal exchange rate adjusts, all three are active under a currency union. The model delivers general conditions under which the positive impact of the demand channel on productivity dominates. Third, it validates the model’s aggregate predictions against a wider set of economies. In particular, it shows that the decline in productivity after a sudden stop is increasing in the flexibility of the exchange rate.

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WORK IN PROGRESS

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Financial Frictions and Firm Exit with Gideon Bornstein

Awarded NSF Grant (co-PI with Gideon Bornstein)

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Frictionless Inflation with Miguel Bandeira and Shiyuan Wang

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Unpacking State Aid in the EU

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