Working Papers
Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that a larger fraction of aggregate productivity growth is due to entry and exit during periods of fast GDP growth. Studies of other countries confirm this empirical relationship. To analyze this relationship, we develop a simple model of firm entry and exit based on Hopenhayn (1992) in which there are analytical expressions for the FHK decomposition. When we introduce reforms that reduce entry costs or reduce barriers to technology adoption into a calibrated model, we find that the entry and exit terms in the FHK decomposition become more important as GDP grows rapidly, just as in the data from Chile and Korea.

Presentations: FRB St. Louis, Autonoma de Barcelona, Midwest Macro (St. Louis), SED (Warsaw), SAET (Cambridge), Minnesota Workshop in Macro Theory, Univ. Torcuato Di Tella, Univ. of Notre Dame, LACEA (Santa Cruz), SAEE (Girona), SED (Toulouse), SAET (Rio), ITAM-PIER Conference, FRB Minneapolis, FRB Cleveland, Univ. of Houston, PUC (Rio), Macro Business CYCLE conference (UCSB), Univ. of Houston, Pontifical Catholic Univ., UT Austin, Western University, SED (Mexico City), Univ. de Montreal, Univ. of Georgia, Bank of Korea, Yonsei Univ.

How are the gains and losses from trade (disruptions) distributed across individuals within a country? First, we document that tradable goods constitute a larger fraction of expenditures for poor households. Second, we build a trade model with nonhomothetic preferences—to generate the documented relationship between tradable expenditure shares, income, and wealth—and uninsurable earnings risk—to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade on households along the income and wealth distribution. In a numerical exercise, we increase trade costs by 20 percentage points and allow the economy to transition to a new steady state. We find that households in the lowest wealth decile experience welfare losses over the transition, measured by permanent consumption equivalents, that are 60 percent larger than those in the highest wealth decile. Finally, we find that the distributional impacts of trade significantly depend on how the tariff revenue is spent. In particular, using tariff revenue to reduce labor income taxes reduces welfare costs both on average and for the poor.
    Presentations: Seoul National Univ., Univ. of Pittsburgh (scheduled), Carnegie Mellon Univ. (scheduled), Carnegie-Rochester-NYU (NYU, scheduled), SAET (Ischia, scheduled).

  • "Real Interest Rates, Inflation, and Default," submitted, with Illenin Kondo and Fabrizio Perri. (slidesdata)
This paper argues that the comovement between inflation and economic activity is an important determinant of real interest rates over time and across countries. First, we show that for advanced economies, periods with more procyclical inflation are associated with lower real rates, but only when there is no risk of default on government debt. Second, we present a model of nominal sovereign debt with domestic risk-averse lenders. With procyclical inflation, nominal bonds pay out more in bad times, making them a good hedge against aggregate risk. In the absence of default risk, procyclical inflation yields lower real rates. However, procyclicality implies that the government needs to make larger (real) payments when the economy deteriorates, which could increase default risk and trigger an increase in real rates. The patterns of real rates predicted by the model are quantitatively consistent with those documented in the data.

Presentations: SED (Seoul), European Central Bank, Midwest Macro Fall (Minnesota), FRB Minneapolis, Banque de France, Midwest Macro Fall (FIU), Federal Reserve Board, SED (Toulouse), Carnegie Mellon Univ., Barcelona GSE Summer Forum, GCER (Georgetown), NBER Summer Institute, UT A&M, FRB Cleveland, Univ. of Notre Dame, McMaster University, Macro System Conference (San Francisco Fed), FRB Atlanta, 
Macro Business CYCLE conference (UCSB), Midwest Macro Fall (Vanderbilt), NBER IFM Program Meeting (Cambridge, scheduled).

Works in Progress
  • "Household Portfolio Accounting," October, 2018, with Chris Telmer and Siqiang Yang.

    What accounts for the large heterogeneity in household portfolio composition in the United States? We consider a standard life-cycle model with labor income risk and portfolio choice (Cocco et al. 2005), augmented with a savings wedge that lowers the return on saving and a risky wedge that lowers the relative return on risky assets. Using U.S. survey data (2004-2016), we compute household-level wedges that rationalize the data, in the spirit of Chari et al. (2007). This paper has two main contributions. First, we use the wedges to guide plausible frictions that researchers should consider. Second, we analyze the extent to which household characteristics can account for the wedges. For example, we find that risky wedges are decreasing in age and education, smaller for self-employed households, home owners, and white households.

    Presentations: SED (Mexico City)
    , Midwest Macro Fall (Vanderbilt).
  • "Optimal Bailouts in Banking and Sovereign Crises," with Zeynep Kabukcuoglu, Chengying Luo, and Cesar Sosa-Padilla.
We study the optimal design of bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees (i.e. conditional capital injections) are the most prevalent way in which sovereigns intervene in distressed banking sectors. Then, we build a model of sovereign borrowing with limited commitment where domestic banks hold government debt and also provide credit to the private sector. Shocks to the banks' capital can trigger banking crises and so the government may find it optimal to extend guarantees over those assets. Larger bailouts improve domestic financial markets and increase output, but they also imply larger fiscal needs for the government and may end up increasing default risk.
  • "The Stages of Economic Growth Revisited," with Daniela Costa, Timothy J. Kehoe, Gajendran Raveendranathan, Kim J. Ruhl.
Following Rostow (1960), we propose a theory for classifying countries according to their stages of growth and for analyzing the determinants of growth in and between the different stages. We conclude that, even if they have inefficient institutions and policies, poorer countries can achieve rapid growth by adopting the technologies and managerial practices of countries like the United States. Rostow (1960) hypothesized that taking off into economic growth was a difficult task for countries in the 19th Century, requiring major changes in institutions. In the 20th Century, however, as the United States and other advanced countries became richer because of improvements in technologies and managerial practices, it became easier for poor countries to take off into rapid growth by adopting some of these improvements. As they become richer, however, their growth rates will decline unless these countries have efficient institutions and policies. For many countries, this requires that they undertake serious institutional and policy reforms. Our analysis further suggests that world economic leadership is unlikely to be provided by less-developed countries like China.