Marco Bonomo

Endogenous Time-Dependent Rules and Inflation Inertia

In this paper, we endogenize fixed price time-dependent rules to examine the output effects of monetary disinflation. We derive the optimal rules in and out of inflationary steady states, and develop a methodology to aggregate individual pricing rules which vary through time. Because of strategic complementarities, we have to solve both problems simultaneously. This allows us to reassess the output costs of monetary disinflations, including aspects such as the roles of the initial level of inflation, and of the degree of strategic complementarity in price. Finally, we relax the strict assumption of pure time-dependent rules by allowing price-setters to re-evaluate their rules at the time disinflation is announced.

State-Dependent Pricing under Infrequent Information: A Unified Framework

We characterize optimal state-dependent pricing rules under various forms of infrequent information. In all models, infrequent price changes arise from the existence of a lump-sum menu cost. We entertain various alternatives for the source and nature of infrequent information. In two benchmark cases with continuously available information, optimal pricing rules are purely state-dependent. In contrast, in all environments with infrequent information, optimal pricing rules are both time- and state-dependent, characterized by trigger strategies that depend on the time elapsed since the last date when information was fully factored into the pricing decision. After considering the case in which information arrives infrequently for exogenous reasons, we address pricing problems in which gathering and processing information also entails a lump-sum cost. When the information and adjustment costs must be incurred simultaneously, the optimal pricing policy is a fixed-price time-dependent rule. When the costs are dissociated, the optimal rule features price stickiness and inattentiveness. Finally, we consider versions of the price-setting problems in which firms continuously entertain partial information. We characterize the optimal pricing rules and provide numerical solution algorithms and examples in a unified framework.

The Political Economy of Exchange Rate Policy in Brazil: 1964-1997

This paper analyzes political economy determinants of exchange rate policy in Brazil over the past thirty years. Two complementary methodologies are used. The first consists of investigating the exchange rate policy historical context over this period. Thus, part of the paper is dedicated to an historical account of the political economy of the exchange rate policy in Brazil from 1964 to 1997. The driving force affecting exchange rate policy was the tradeoff between the positive effect of a depreciated exchange rate on the balance of payments and its negative effect on inflation. The exchange rate policy resulting from this tradeoff depended on the political environment. An analytical framework is sketched to interpret the real exchange rate policy history, and then it is extended to encompass short-run election cycles. The second methodology is statistical. A Markov Switching Model is used to characterize statistically the exchange rate regimes, defined as valued or devalued real exchange rates, and the influence of political economy variables on regime changes. The results support the interpretation pursued in the analytical part. We found statistical evidence that the probability of an appreciated exchange rate is higher under democracy than under dictatorship. Furthermore, according to our statistical results there is also an election cycle: the probability of having an appreciated exchange rate is higher in the months preceding elections while the probability of having a depreciated exchange rate is higher in the months succeeding elections.

Macroeconomic and Financial Consequences of the Post-Crisis Government-Driven Credit Expansion in Brazil

Government-driven credit played an important role in countervailing the private credit crunch in Brazil during the recent financial crisis. However, government credit concessions continued to expand after the economy recovered. This paper investigates some important features of this expansion using a huge repository of loan contracts between banks and firms, composing an unbalanced panel of almost 1 million firms between 2004 and 2012. The results show that larger, older and less risky firms have benefited most from the government-sponsored credit expansion. Additionally, although higher access to earmarked credit tends to lead to higher leverage, the effect on investment appears to be insignificant for publicly traded firms. Since interest rates on earmarked loans are lower than market interest rates, firms with higher access to this type of loan tend to lower the cost of debt.

Time- and State-Dependent Pricing: A Unified Framework

We develop a tractable unified framework for solving optimal time- and state-dependent price-setting problems. We illustrate our approach by solving a price-setting problem where adjustments are costly, and there are two types of information. One type is freely and continuously available while the other is costly and requires the payment of a lump-sum cost to be observed. Our choice of state variables is key to make the problem tractable. Specifically, we replace the usual state variable in state-dependent problems - the discrepancy between the firms price and its frictionless optimal level - with its conditional expectation on the firms information set, and augment the state space with the time elapsed since the last date information was fully factored into the pricing decision (information date). This allows us to formulate the price-setting problem as a two-dimensional optimal stopping problem. Our analysis uncovers new insights about price setting. Time dependency in pricing rules arises as a consequence of the build-up of unobserved information. In these circumstances, the inaction range changes as a function of the time elapsed since the last information date. When the next information date is known, the presence of menu costs produce an extreme form of inaction: irrespective of the size of the expected price discrepancy, it is never optimal to adjust prior to the information date.

Short-Selling Restrictions and Returns: A Natural Experiment

Restrictions on short-selling may impede market participants from fully expressing their opinions about an asset, causing departures from price efficiency (Miller (1977)). Measuring the impact of short-selling restriction on returns has been elusive because the decision to sell short reflects expectations on returns. We measure the causal impact of short-selling restrictions on returns by taking advantage of an unique dataset and an unique source of exogenous variation in rental fees. In Brazil during the 2010-2013 period rental transaction from individual investors to mutual funds carried an implicit tax discount on days of distribution of Interest on Net Equity (IoNE). The possibility of tax arbitrage produces an exogenous spike in rental fees and short interest during the days surrounding IoNE distribution, making it prohibitively expensive to short-sell for speculative reasons. Our data contains all rental transaction and the identity of the parts, thus allowing us identify transactions for tax arbitrage. We find that the variation of rental fees induced by the tax arbitrage operations has a large impact on abnormal returns, corroborating Millers hypothesis.

Deindustrialization and Economic Diversification

We derive a measure of the degree of inefficiency of the production structure of an economy by casting its optimal sectoral composition as the outcome of a portfolio allocation problem, in the spirit of Koren and Tenreyro (2004). We use the framework to construct measures of inefficiency using sectoral data for 194 countries, document the patterns of inefficiency by region, income group etc., and investigate which countries might have reasons to pursue industrial policies to improve on the allocation of economic activity across sectors. We then undertake an exploratory analysis of the empirical content of our measure of inefficiency, and find that it correlates negatively with measures of good institutions and governance, broadly in line with the evidence in Hall and Jones (1999).