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

December 2019 [pdf]

Central banks have a primary task of pursuing price stability. They do so by issuing different forms of money, setting an array of interest rates, producing fiscal revenues, defining the unit of account, and affecting marginal costs of production via credit regulations and other policies. This article surveys the economic theories that justify the central bank’s ability to use these tools to control inflation around a target. It presents alternative approaches as consistent with each other, as opposed to as conflicting ideological camps. Each of them relies on equilibrium forces in different markets within a common dynamic general equilibrium structure.

Sudden Stops, Productivity, and the Exchange Rate Job market paper

October 2019 [pdf]

Following a sudden stop, real exchange rates can realign through a nominal exchange rate depreciation, lower domestic prices, or a combination of both. This paper makes four contributions to understand how the type of adjustment shapes the response of macroeconomic variables, in particular, productivity, to such an episode. First, it documents that TFP systematically collapses after a sudden stop under a flexible exchange rate arrangement while it moderately improves if taking place within a currency union. Second, using firm-level data for two sudden stops in Spain, it highlights that the difference in the productivity response is largely driven by entry and exit firm dynamics. Third, it proposes a small open economy DSGE framework with firm selection into production and endogenous mark-ups that is consistent with the empirical findings. The model nests three mechanisms through which a shock 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 demand channel dominates in the latter scenario. Fourth, it uses a quantitative version of the model to revisit the optimality of exchange rate policy after a sudden stop.


Paying Bankers: Rents, Risk, and Performance with Sophia Chen and Deniz Igan

Dual Mandates and Excessive Hawkishness: a Principal-Agent Approach