Aggregate and Distributional Consequences of Capital Taxation (with L. Brun and I. González)

This paper proposes a quantitative macroeconomic model to evaluate tax policy reforms based on the premise that markets are not competitive. We assume a macro-finance structure in which unproductive rents are capitalized by financial markets, allowing for systematic deviations between the stock of productive capital and the value of financial wealth held by households. This setup induces general equilibrium effects of capital income taxes that are expansionary. For standard parametrizations, we find that these effects reverse the contractionary effects typically obtained in the macro literature. Our model includes rich institutional details and other features intended to capture the distributional and macroeconomic impacts of fiscal policy. Most notably, public investment is complementary to private factors of production and therefore generates positive productivity spillovers, and labor markets are segmented and monopsonistic, which endogenously produces wage inequality. We use this setup to quantitatively study the effects of increasing the corporate tax rate. In our benchmark calibration, increasing the corporate tax rate from 21% to 28% stimulates aggregate investment, output and wages.

International Strategic Spillovers of Monetary Policy [paper, slides]

This paper studies the endogenous reaction of domestic monetary policy to changes in foreign policies. In particular, I examine the existence and magnitude of cross-border strategic spillovers between countries that are tightly linked through global financial and trade networks. Using a spatial / network model that treats every country’s monetary policy as potentially endogenous, I provide empirical evidence that strategic spillovers are not only sizable but are also amplified depending on the network structure of the global economy. That a change in policy in one country leads to an adjustment in policy in another country suggests that the underlying macroeconomic spillovers are significant. I also present evidence that capital account policies provide substantial insulation against foreign monetary shocks.

Capital Controls and the Real Exchange Rate: Do Controls Promote Disequilibria?  [paper]

(Journal of International Economics)

The consensus view is that capital controls can effectively lengthen the maturity composition of capital inflows and increase the independence of monetary policy but are not generally effective at reducing net inflows and influencing the real exchange rate. This paper studies the adjustment dynamics of the real exchange rate towards its long-run equilibrium and presents empirical evidence that capital controls increase the persistence of misalignments. Allowing the speed of adjustment to vary according to the intensity of restrictions on capital flows, it is shown that the real exchange rate converges to its long-run level at significantly slower rates in countries with capital controls. This result is stronger when the exchange rate is undervalued and is independent of confounding factors such as the exchange rate regime and other forms of heterogeneity affecting the speed of adjustment. I also find evidence that controls on capital inflows have greater effects than controls on outflows. In addition, while the combination of capital controls with a fixed or managed exchange rate regime significantly increases the persistence of misalignments, controls appear to loose traction under more flexible exchange rate arrangements.

Did Quantitative Easing Increase Income Inequality?  (with Gerald Epstein) [paperslides]

(INET Working Paper No. 28)


The impact of the post-crisis Federal Reserve policy of near-zero interest rates and Quantitative Easing (QE) on income and wealth inequality has become an important policy and political issue. Critics have argued that by raising asset prices, near-zero interest rates and QE have significantly contributed to increases in inequality, while practitioners of central banking, counter that the distributional impact have probably been either neutral or even egalitarian in nature due to its employment impacts. Yet there has been little academic research that addresses empirically this important question. We use data from the Federal Reserve’s Survey of Consumer Finances to analyze the impact of three key channels of QE policy on the distribution of income:  1) the employment channel, 2) the asset appreciation and return channel, and 3) the mortgage refinancing channel. Applying the distributional decomposition method proposed by Firpo et al. (2007), we find that while employment changes and mortgage refinancing were equalizing, these impacts were nonetheless swamped by the large dis-equalizing effects of asset appreciations. In order to identify causality, we propose a simple counterfactual exercise building on the extensive literature on the macroeconomic impacts of QE on asset prices and the unemployment rate. We conclude that QE likely led to a modest increase in income inequality.

Sustained Investment Surges (with Emiliano Libman and Arslan Razmi) [paper]

(Oxford Economic Papers, Accepted)


Existing empirical studies have focused on determinants of investment. We focus instead on the factors promoting episodes of accelerated capital stock growth that last seven years or longer. After identifying 190 such episodes we employ econometric analysis to explore: (i) the conditions that precede episodes, (ii) structural changes during episodes, and (iii) the characteristics that distinguish episodes that are sustained beyond the final year from those that are not. Turning points in investment tend to be preceded by stable and undervalued real exchange rates, low inflation, and net capital outflows, especially on the portfolio account. We also find some evidence for a positive correlation with large increases in natural resource rents and trade openness. Finally, we find that economies typically experience a shift in economic structure toward the manufacturing sector during periods of accelerated investment.

Long-term Trends in Intra-financial Lending in the U.S.  (with G. Epstein and I. Levina) [paper]

(Eastern Economics Journal)

This paper examines the evolution of intra-financial sector lending in the United States, 1950–2012, constructing estimates from the Federal Reserve’s Flow of Funds Accounts. Lending between financial institutions has grown nearly five-fold since the 1950s and currently accounts for roughly half of all financial sector lending. In the run up to the financial crisis of 2007–2008, the growth of intra-financial lending was concentrated in assets highly implicated in the genesis of the crisis, suggesting that this growth may have contributed to the crisis. This growth in intra-financial lending also raises questions about the contribution of the financial sector to the real economy.

Work In Progress

Aggregate Demand Management in Natural Resources Abundant Economies [email me for a draft] ABSTRACT

I build a macroeconomic model of a natural resource abundant small open economy. The model is in the tradition of the canonical dependent economy framework with one key departure: the non-tradable sector features a non-clearing product market due to the existence of search frictions. I study the equilibrium in this economy under the assumption of rigid prices in the non-tradable sector. The equilibrium is shown to be generically inefficient due to aggregate demand externalities arising from natural resource endowments. In this setting, optimal government transfer policy is countercyclical and may entail the permanent buildup of a sovereign wealth fund. I apply this framework to two classic questions in international and development economics: optimal exchange rate policy and development policy in the presence of learning-by-doing spillovers.

Leaky Capital Controls in the Presence of Savvy Financial Markets [email me for a draft]

This paper studies the social welfare implications of capital controls when controls are imperfectly binding and financial markets actively aim to bypass their enforcement. I consider a series of models of a small open economy featuring a “Dutch disease” externality arising from excessive capital inflows, as well as strategic interactions between a regulatory authority attempting to enforce capital controls and a financial sector attempting to evade them. In contrast to most existing theoretical models, which assume perfectly enforceable capital controls, the effective tax on capital inflows in this essay is endogenously determined by the interplay of the administrative capacity of domestic regulators, the complexity or sophistication of the financial sector, and the existence of regulatory loopholes. The models suggest that capital controls, by internalizing externalities associated with capital inflows, can improve welfare relative to a “laissez-faire” benchmark even when these are imperfectly binding.

Monetary Policy and Capital Controls: Cooperation in a World with Spillovers (with M. Guzman and J.E. Stiglitz)

The Real Exchange Rate and Vertical Integration (with Joao de Souza)