Wilfredo Leiva Maldonado

Inflation and income inequality: A shopping-time approach

Our work is based on a simplified heterogenous-agent shopping time economy in which economic agents present distinct productivities in the production of the consumption good, and differentiated access to transacting assets. The purpose of the model is to investigate whether, by focusing the analysis solely on endogenously determined shopping times, one can generate a positive correlation between inflation and income inequality. Our main result is to show that, provided the productivity of the interest-bearing asset in the transacting technology is high enough, it is true true that a positive link between inflation and income inequality is generated. Our next step is to show, through analysis of the steady-state equations, that our approach can be interpreted as a mirror image of the usual inflation-tax argument for income concentration. An example is offered to illustrate the mechanism.

Finance, Banking, and Regulation in Emerging Economies: An Overview

This special issue of Emerging Markets Finance & Trade features selected papers presented at the International Conference on Finance, Banking, and Regulation, held at Catholic University of Brasília’s campus II (UCB [acronym in Portuguese]) in Brasília, Brazil, on July 16–18, 2014. This conference was a joint effort of UCB’s Graduate Program in Economics and the Society for the Study of Emerging Markets. The conference featured four keynote speaker presentations by Ali Kutan, Gulnur Muradoglu, Jouko Vilmunen, and Pedro Gomis-Porqueras plus thirty-seven regular session articles, seven of which appear in this special issue of Emerging Markets Finance & Trade. The twenty-first century saw the rise of new powers to the center stage of global politics. The acronym BRICS, referring to the largest economies among these rising powers (Brazil, Russia, India, China, and South Africa), became a frequent reference in the specialized media. What these countries have in common is that they are frequently referred to as “developing economies” or “emerging markets.” They lack many of the institutions that make markets function in the developed world, and yet they have been growing and claiming a more prominent role in world politics. It is increasingly important, thus, for social scientists to better understand how emerging markets work. Do we see in these markets the same stylized facts commonly seen in developed economies? If so, do we observe any differences in the magnitude and scope of these phenomena? The International Conference on Finance, Banking, and Regulation included studies that shed light on these issues. This special issue gathers some of the outstanding work presented at the conference. In the first article, Luiz Alberto D’Ávila de Araújo and Joaquim Pinto de Andrade model the yield curve using a continuous estimation method: the smooth transition regression. The authors focus their analysis on the Brazilian case and show that nonlinearities in the yield curve may explain the pitfalls of monetary policy; that is, its lack of effectiveness in specific periods. These results represent an important contribution to the issue of monetary policy design for emerging markets. In the second featured article, Livia F. Pimentel and Leonardo P. Santiago study the problem of portfolio selection of pension funds. They solve the optimal portfolio problem when risk-free assets are not available to investors. Pimentel and Santiago perform this analysis using stochastic dynamic programming methods combined with Monte Carlo simulations when investors’ preferences have hyperbolic absolute risk aversion (HARA) utility functions. They conclude, among other things, that HARA utility functions are better than constant relative risk aversion (CARA) utility functions to characterize the optimal portfolio selection. The third article of this special edition, written by Vanessa Hoffmann De Quadros, Juan Carlos González-Avella, and José Roberto Iglesias, contributes to the ongoing debate on how to model financial contagion using complex network tools. The authors show that both size and network topology are relevant to evaluate the spread of financial crises (contagion) through the network. An

Role of optimization in the human dynamics of task execution

In order to explain the empirical evidence that the dynamics of human activity may not be well modeled by Poisson processes, a model based on queuing processes was built in the literature [A. L. Barabasi, Nature (London) 435, 207 (2005)]. The main assumption behind that model is that people execute their tasks based on a protocol that first executes the high priority item. In this context, the purpose of this paper is to analyze the validity of that hypothesis assuming that people are rational agents that make their decisions in order to minimize the cost of keeping nonexecuted tasks on the list. Therefore, we build and analytically solve a dynamic programming model with two priority types of tasks and show that the validity of this hypothesis depends strongly on the structure of the instantaneous costs that a person has to face if a given task is kept on the list for more than one period. Moreover, one interesting finding is that in one of the situations the protocol used to execute the tasks generates complex one-dimensional dynamics.

Cointegrated Periodically Collapsing Bubbles in the Exchange Rate of ‘BRICS’

ABSTRACT We test the occurrence of periodically recurring rational bubbles in the exchange rate of each of the “BRICS” countries currency relative to the US dollar. The forward exchange rate is used as a proxy for the expected exchange rate, different Purchasing Parity Power (PPP)-based rules for the fundamental exchange rate are considered, and its initial value is endogenously determined. For the chosen model, the regime switching equation satisfactorily fits the data, confirming the presence of rational bubbles for all countries. The dynamics of the exchange rate series for each country is interpreted with the help of the estimated bubbles. The bubbles are compared across countries, found to be cointegrated, and this is interpreted as evidence of the international transmission of exchange rate shocks between these countries.

Price differentiation and menu costs in credit card payments

We build a model of credit card payments where the retailers are allowed to charge differential prices depending on the instrument of payment chosen by the consumer. We follow the approach in Rochet and Wright (2010) but assume a credit card system without any type of non-surcharge rule. In a Hotelling competition framework at the retailers level, the competitive equilibrium prices are computed assuming that the store credit provided by the retailer is less cost efficient than the one provided by the credit card. In accordance with the literature, we obtain that the interchange fee becomes neutral if we eliminate the no-surcharge rule, when the interchange fee loses its ability to distort the individual consumer’s decisions and displace the aggregate consumers’ welfare from its maximum level. We prove that the average price obtained under price differentiation is smaller than the single retail price under the non-surcharge rule, despite the retailer’s margins being the same in both scenarios. In addition, we introduce menu costs to prove that there is a value for the interchange fee such that there is equilibrium with price differentiation if and only if that fee is above this value. It must be interpreted as an endogenous cap for the interchange fee fixed by the credit card industry. Finally, we also obtain that under price differentiation with menu costs there is a non cooperative Nash equilibrium as in the well known “prisoner’s dilemma” game.

Solving Euler Equations: Classical Methods and the C 1 Contraction Mapping Method Revisited

In this paper we describe the classical methods used to solve the Euler equations. Special attention is devoted to the iterative method based on a contraction mapping derived from these equations in Maldonado and Moreira (2003). We test the numerical robustness of this method when it is used in models with sensitiveness to initial conditions. Finally we extend the method to the case of stochastic Euler equations.

Uma Nota Sobre a Oferta de EILD e Fechamento Vertical do Mercado de Banda Larga no Brasil

O presente trabalho tem o objetivo de analisar a estrutura concorrencial do mercado de redes de transporte de telecomunicacoes, considerando a oferta de Exploracao Industrial de Linhas Dedicadas (EILD). Para tal, sao utilizadas informacoes municipais referentes a oferta de EILD e a demanda por servicos de banda larga em cada municipio. Apos a avaliacao da estrutura concorrencial e feita uma analise econometrica de dados referentes a demanda pelos servicos de banda larga em cada municipio de forma a avaliar a existencia de evidencias de fechamento vertical nesse mercado.

Competitive Equilibrium with Restricted Participation: The Case of Circular Trade

In a model of competitive equilibrium with restricted participation, we prove the existence of a circular competitive equilibrium (CCE). There is a unique CCE if all coefficients of relative risk aversion are bounded above by 1. The direction of trade is determined by the product of the marginal rates of substitution calculated at initial endowments. We also propose a measure for the trade volume (for each individual and for the entire market), prove a no-trade result, and calculate wealth and belief effects on the circular trade economy.

Cointegrated Periodically Collapsing Bubbles in the Exchange Rate of 'BRICS' Countries

This paper tests the occurrence of rational bubbles in the exchange rate of Brazil, Russia, India, China and South Africa (the ‘BRICS’ countries group) against the US dollar. We consider bubbles of the periodically recurring variety, and assume that the fundamental value follows a modified PPP relation which takes into account interest rate differentials, starting from a reference value which is endogenously determined. At each point in time the probability of collapse of the bubble to is a nonlinear logistic function of the absolute size of the bubble and is, therefore, also endogenous. The expected next period bubble size if the future regime is collapse is a linear function of the current bubble size whose parameters are also endogenously estimated. The estimation uses a maximum likelihood procedure, and the results support the model, which passes the specification tests. The hypothesis of rational expectations in the market for the forward exchange rate, which is used as a proxy of the expected exchange rate, is also tested and accepted for 3 of the 5 countries. The hypothesis of two linear regimes (rather than the non-linear regimes we use) is also tested and rejected for 3 of the 5 countries. We discuss the dynamics of the absolute bubble, and also compare the time series of the bubbles for the several countries, relative to the corresponding fundamental value. We test for unit roots in the relative bubbles and find that they are integrated, and that they pass Johansen’s the cointegration test. Finally we estimate an error correction model to discuss the long term relation between the relative bubbles and the speed of adjustment of each country’s relative bubble to shocks to the long term relation between them.

A dynamic model of education level choice: application to Brazilian states

An empirical analysis of the education level / wage curve in the Brazilian states shows the S-shape of that function. When introducing that function in a dynamic programming problem of schooling choice, a non-concave problem arises and we may find multiplicity of stationary state equilibria. Some of them present local stability. This may explain the persistence of several education levels in the long run of the economy and as a consequence it results the poverty trap. We also analyze the sensitivity of the stationary states to changes in the education cost in order to evaluate the impact of public educational policies.