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Coronavirus disease 2019 (COVID-19) is exacerbating inequalities in the US. We build an agent-based model to elucidate the differential causal effects of nonpharmaceutical interventions on different communities and validate the results with US data. We simulate viral transmission and the consequent deterioration of economic conditions on socioeconomically disadvantaged and privileged populations. As found in data, our model shows that the trade-off between COVID-19 deaths and deaths of despair, dependent on the lockdown level, only exists in the socioeconomically disadvantaged population. Moreover, household overcrowding is a strong predictor of the infection rate. The model also yields new insights that fill in the gaps of our data analysis. While subsidisation narrows the socioeconomic gap in deaths of despair, the combination of testing and contact tracing alone is effective at reducing disparities in both types of death. Our results contribute to policy modelling and evaluation for reducing inequality during a pandemic.

New data-gathering techniques, often referred to as “Big Data” have the potential to improve statistics and empirical research in economics. In this paper we describe our work with online data at the Billion Prices Project at MIT and discuss key lessons for both inflation measurement and some fundamental research questions in macro and international economics. In particular, we show how online prices can be used to construct daily price indexes in multiple countries and to avoid measurement biases that distort evidence of price stickiness and international relative prices. We emphasize how Big Data technologies are providing macro and international economists with opportunities to stop treating the data as “given” and to get directly involved with data collection., Sloan School of Management

The debt crisis in several European Union nations has resulted in a set of downgrades in sovereign ratings, sparking a lively debate whether these opinions actually matter. Ratings and bond spreads may both be considered as noisy signals of fundamentals. Ratings only add value if, controlling for spreads and observable country fundamentals, they help explain other market variables. We employed a unique dataset of over 75 000 daily observations on emerging countries around rating actions by the three major agencies. We found that ratings do indeed add information, and this finding is robust to a variety of different tests. Copyright © 2012 John Wiley & Sons, Ltd.

A central assumption of open economy macro models with nominal rigidities relates to the currency in which goods are priced, whether there is so-called producer currency pricing or local currency pricing. This has important implications for exchange rate pass-through and optimal exchange rate policy. We show, using novel transaction level information on currency and prices for U.S. imports, that even conditional on a price change, there is a large difference in the pass-through of the average good priced in dollars (25%) versus non-dollars (95%). This finding is contrary to the assumption in a large class of models that the currency of pricing is exogenous and is evidence of an important selection effect that results from endogenous currency choice. We describe a model of optimal currency choice in an environment of staggered price setting and show that the empirical evidence strongly supports the model's predictions of the relation between currency choice and pass-through. We further document evidence of significant real rigidities, with the pass-through of dollar pricers increasing above 50% in the long-run. Lastly, we numerically illustrate the currency choice decision in both a Calvo and a menu-cost model with variable mark-ups and imported intermediate inputs and evaluate the ability of these models to match pass-through patterns documented in the data.

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross-national dataset into two sub-samples: (i) colonies versus non-colonies; and (ii) continents aligned on an East–West versus those aligned on a North–South axis. We exploit the difference in the structural variances in these two sub-samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.

This paper develops a method for solving the identification problem that arises in simultaneous-equation models. It is based on the heteroskedasticity of the structural shocks. For simplicity, I consider heteroskedasticity that can be described as a two-regime process and show that the system is just identified. I discuss identification under general conditions, such as more than two regimes, when common unobservable shocks exist, and situations in which the nature of the heteroskedasticity is misspecified. Finally, I use this methodology to measure the contemporaneous relationship between the returns on Argentinean, Brazilian, and Mexican sovereign bonds-a case in which standard identification methodologies do not apply. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

The ‘border effects’ literature finds that political boundaries have a large impact on relative prices across locations. In this paper, we show that the standard empirical specification suffers from selection bias and propose a new methodology based on binned-quantile regressions. We use a novel micro-price dataset from Uruguay and focus on city borders. We find that, when the standard methodology is used, two supermarkets separated by 10 km across two different cities have the same price dispersion as two supermarkets separated by 30 km within the same city, implying that crossing a city border is equivalent to tripling the distance. By contrast, when upper quantiles are used the city border effect disappears. These findings imply that transport cost have been systematically underestimated by the previous literature. Our methodology can be applied to measure any kind of border effect. We illustrate this in the context of online–offline price dispersion to measure an ‘online-border’ effect in the city of Montevideo. Copyright © 2015 John Wiley & Sons, Ltd.

Different theories of price stickiness have distinct implications on the properties of the distribution of price changes. One of those characteristics is the number of modes the distribution possess. We formally test for the number of modes in the price change distribution of 32 supermarkets, spanning 23 countries and 5 continents. We present results for three modality tests: the two best-known tests in the statistical literature –Hartigan’s Dip and Silverman’s Bandwith– and a test designed in this paper, called the the Proportional Mass test. Three important results are uncovered. First, when the traditional tests are used, the unimodality around zero is rejected in about 90 percent of the establishments. When we used the Proportional Mass test, which is much more conservative than the first two, we still reject unimodality in two thirds of the supermarkets. Second, if we center our test on the largest mode – as opposed to zero – we have few rejections of unimodality. Finally, the rejection of unimodality changes through time. In countries where there is large inflation the distribution is unimodal around a positive value. In those countries when the inflation drops – which happened almost everywhere during the recent financial recession – unimodality starts to disappear again. These results offer new stylized facts that theoretical models of price stickiness need to match. We perform a simple calibration exercise at the end using the model by Alvarez et al. (2010) and applying our PM test of unimodality to the model’s distributions.

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross-national dataset into two sub-samples: (i) colonies versus non-colonies; and (ii) continents aligned on an East–West versus those aligned on a North–South axis. We exploit the difference in the structural variances in these two sub-samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.

This paper presents an identification strategy that allows us to study both the sectoral effects of monetary policy and the role that monetary policy plays in the transmission of sectoral shocks. We apply our methodology to the case of the U.S. and find some significant differences in the sectorial responses to monetary policy. We also find that monetary policy is a significant source of sectoral transfers. In particular, a shock to Equipment and Software investment, which we naturally identify with the High-tech crises, induces a response by the monetary authority that generates a temporary boom in Residential Investment and Durable Consumption but has almost no effect on the high-tech sector. Finally, we perform an exercise evaluating what the model predicts regarding the automatic and a more aggressive monetary policy response to a shock similar to the one that hit the U.S. in early 2001. We find that the actual drop in interest rates we have observed is in line with the predictions of the model.

Movements in the prices of different assets are likely to directly influence one another. This paper develops a model that identifies the contemporaneous interactions between asset prices in U.S. financial markets by relying on the heteroskedasticity in their movements. In particular, we estimate a structural-form GARCH' model that includes the short-term interest rate, the long-term interest rate, and the stock market. The results indicate that there are strong contemporaneous interactions between these variables. Accounting for this behavior is critical for interpreting daily changes in asset prices and for predicting the future paths of their variances and correlations. We demonstrate the importance of this consideration in a risk-management application.

The existence of a natural resource curse has been a longstanding theme in the economic literature and in policy discussions. We propose an alternative mechanism and study its policy implications. The mechanism is based on the interaction between two building blocks: specialization in non-tradables and financial market imperfections. We show that if a country has a sufficiently large non-resource tradable sector, relative prices can be stable, even when the resource sector generates significant volatility in the demand for non-tradables. However, when the non-resource tradable sector disappears, the economy becomes much more volatile, because shocks to the demand for non-tradables - possibly associated with shocks to resource income - will not be accommodated by movements in the allocation of labor but instead by expenditure-switching. This requires much higher relative price movements. The presence of bankruptcy costs makes interest rates dependent on relative price volatility. These two effects interact causing the economy to specialize inefficiently away from non-resource tradables: the less it produces of them, the greater the volatility of relative prices, the higher the interest rate the sector faces, causing it to shrink even further until it disappears. At that point, the economy will face an even higher interest rate and a lower level of capital and output in the non-tradable sector. An increase in resource income that leads to specialization causes a large decline in welfare: thus the idea of the curse. Specialization is determined by the expected size and volatility in resource income. The paper justifies stabilization and savings policies as well as policies to make financial markets more efficient. However, we also find some support for more interventionist second-best trade and financial

Estimating the response of asset prices to changes in monetary policy is complicated by the endogeneity of policy decisions and the fact that both interest rates and asset prices react to numerous other variables. This paper develops a new estimator that is based on the heteroskedasticity that exists in high-frequency data. We show that the response of asset prices to changes in monetary policy can be identified based on the increase in the variance of policy shocks that occurs on days of FOMC meetings and of the Chairman's semi-annual monetary policy testimony to Congress. The identification approach employed requires a much weaker set of assumptions than needed under the “event-study” approach that is typically used in this context. The results indicate that an increase in short-term interest rates results in a decline in stock prices and in an upward shift in the yield curve that becomes smaller at longer maturities. The findings also suggest that the event-study estimates contain biases that make the estimated effects on stock prices appear too small and those on Treasury yields too large.

During the last two decades, many Latin American countries engaged in disinflation programs based on both exchange rate management and fiscal reforms. However, in most instances, part of the fiscal reform was delayed or not implemented completely, so the fiscal deficit increased and the program had to be abandoned. The aftermath of these programs is not encouraging, since most of these policies turned out to be failures, lowering reserves and causing higher inflation rates. Given this record, it is worth asking why governments start a disinflation program even though the fiscal equilibrium is not guaranteed. In this paper we show that, if the reform process is uncertain and inflation has welfare costs, the optimal exchange rate policy implies the initiation of a disinflation program at the announcement of the fiscal reform. Additionally, we show that even if there exists a possibility of a balance of payments crisis, it is still optimal to initiate a disinflation program. This means that, in this set up, avoiding the crisis with probability one is suboptimal. Finally, we show that it is optimal to engage in a sequence of stabilization programs until one of them is successful.

The empirical literature on contagion has mainly measured the propagation of shocks across countries using daily stock markets, interest rates, and exchange rates. Several methodologies have been used for this purpose, however, the properties of the data introduces important limitations on the implementation of these procedures, as well as on the interpretation of the results. This paper, has three objectives: First, it evaluates some of the techniques that have been used frequently to measure contagion. The paper argues that if the data suffers from heteroskedasticity (conditional or not), omitted variables and simultaneous equation problems, the conclusions drawn from most of the procedures could be biased. Second, the paper summarizes two new procedures that have been developed to cope with these problems. One methodology is aimed to test for the stability of parameters, while the other one estimates consistently the contemporaneous relationship across countries. Finally, the paper estimates (consistently) the contemporaneous transmission mechanism between emerging stock markets, and bond markets. Furthermore, it is found that regional variables, as well as trade linkages, constitute a sizeable explanation of the strength of the propagation of shocks across bond markets, but not as important in stock markets.

Movements in the stock market can have a significant impact on the macroeconomy and are therefore likely to be an important factor in the determination of monetary policy. However, little is known about the magnitude of the Federal Reserve's reaction to the stock market. One reason is that it is difficult to estimate the policy reaction because of the simultaneous response of equity prices to interest rate changes. This paper uses an identification technique based on the heteroskedasticity of stock market returns to identify the reaction of monetary policy to the stock market. The results indicate that monetary policy reacts significantly to stock market movements, with a 5% rise (fall) in the S&P 500 index increasing the likelihood of a 25 basis point tightening (easing) by about a half. This reaction is roughly of the magnitude that would be expected from estimates of the impact of stock market movements on aggregate demand. Thus, it appears that the Federal Reserve systematically responds to stock price movements only to the extent warranted by their impact on the macroeconomy.

This paper analyzes bond and stock markets in Latin America and uses these patterns to investigate whether contagion occurred in the 1990's. It defines shift-contagion' as a significant increase in cross-market linkages after a shock to one country or region. Several coin-toss examples and a simple model show that the standard tests for contagion are biased due to the presence of heteroscedasticity, endogeneity, and omitted-variable bias. Recent empirical work which addresses these problems finds little evidence of shift-contagion during a range of crisis periods. Instead, this work argues that many countries are highly interdependent' in all states of the world and the strong cross-country linkages which exist after a crisis are not significantly different than those during more stable periods. These findings have a number of implications for Latin America.