Domenico Ferraro

Can Oil Prices Forecast Exchange Rates

This paper investigates whether oil price shocks have a reliable and stable out-of-sample relationship with the Canadian/U.S Dollar nominal exchange rate. Despite state-of-the-art methodologies and clean data, we find paradoxically little systematic relation between oil prices and the exchange rate, especially if one takes the monthly and quarterly frequencies into account. In contrast, the very short term relationship between oil prices and exchange rates at the daily frequency is rather robust, and holds no matter whether we use contemporaneous (realized) or lagged oil price shocks in our regression. However, the short-term out-of-sample predictive ability is ephemeral, and it mostly appears after time variation in the forecasting ability of the models has been appropriately taken into account. We show that a similar results hold for other currencies and commodity price shocks.

Commodity Prices and Growth

In this paper we propose an endogenous growth model of commodity-rich economies in which: (i) long-run (steady-state) growth is endogenous and yet independent of commodity prices; (ii) commodity prices affect short-run growth through transitional dynamics; and (iii) the status of net commodity importer/exporter is endogenous. We argue that these predictions are consistent with historical evidence from the 19th to the 21st century.

Fast Rises, Slow Declines: Asymmetric Unemployment Dynamics with Matching Frictions

This paper argues that the canonical search-and-matching model cannot generate the observed cyclical asymmetry of the unemployment rate. In the United States, the unemployment rate raises quickly and abruptly at the onset of contractions and declines slowly and gradually during expansions. This pattern produces positive skewness in the distribution of unemployment rate changes, while the model produces a counterfactually negative skewness. The key feature of the model responsible for this counterfactual prediction is the convexity of hiring costs in aggregate employment, which leads to excessive responsiveness of job vacancies to positive shocks in periods of high unemployment. I argue that the inability of the model to replicate the cyclical asymmetry in the data stands regardless of its ability to generate realistic fluctuations in unemployment. Furthermore, high replacement rates and real wage rigidity (both fixed and downward rigid wages) - commonly used to enhance amplification of shocks - do not resolve the puzzle, rather they make it worse.

Implications of Tax Policy for Innovation and Aggregate Productivity Growth

The quantitative implications of income taxation for innovation and aggregate productivity growth are evaluated in the context of a Schumpeterian model of innovation-led growth. In the model, innovation comes from entrant firms creating new products and from incumbent firms improving own existing products. The model embodies key features of the U.S. government sector: (i) an individual income (labor income, dividends, and capital gains) and (ii) corporate tax; (iii) a consumption tax; and (iv) government purchases. The model is further restricted to fit observations for the post-war U.S. economy. The results suggest that endogenous movements in TFP constitute a quantitatively important channel for the transmission of tax policy to real GDP growth. Endogenous market structure plays a key role in the propagation of tax shocks.

The Aging of the Baby Boomers: Demographics and Propagation of Tax Shocks

We investigate the consequences of demographic change for the effects of tax cuts in the United States over the post-WWII period. Using narratively identified tax changes as proxies for structural shocks, we establish that the responsiveness of unemployment rates to tax changes largely varies across age groups: the unemployment rate response of the young is nearly twice as large as that of prime-age workers. Such heterogeneity is the channel through which shifts in the age composition of the labor force impact the response of the aggregate U.S. unemployment rate to tax cuts. We find that the aging of the Baby Boomers considerably reduces the effects of tax cuts on unemployment.

Volatility and Slow Technology Diffusion

I study the effects of uncertainty on technology adoption and thereby on volatility and growth. I present an analytically-tractable model in which: (i) uncertainty about the returns to adoption delays technology diffusion; and (ii) the mean and volatility of output growth are jointly determined in equilibrium. I then test the key predictions of the model by studying the introduction of three major information and communication technologies (ICTs) - computers, internet, and cell phones. I find that countries with more volatile growth rates of real GDP per capita have higher time adoption lags and lower average growth, as predicted by the model.