Christian Bustamante

Current Research

More Money for Some: Monetary Policy Meets a Rich and Persistent Household Wealth Distribution

Open market operations (OMOs) are one of the most prominent instruments that central banks use in the implementation of monetary policy. In this paper, we study the implications of having a non-degenerate distribution of money for the conduct of monetary policy through open market operations, while accounting for the persistent differences in assets and portfolios that we observe in the data. To do so, we build a general equilibrium search-theoretic model of money where frictions in decentralized trading render money essential. Other than cash, our model allows households to save through illiquid short-term government bonds. Both money and bonds are supplied by a unified fiscal and monetary authority which manages the provision of public liquidity by means of open market operations. In the model, both assets are valuable for agents as they can use money to obtain goods in decentralized markets and bonds to partially self-insure against idiosyncratic liquidity shocks. We study the properties of the stationary equilibrium and show that the impossibility for individuals of re-balancing their portfolios right after experiencing a liquidity shock is the main driver of the observed heterogeneity in asset holdings and prices. Also, by comparing different stationary equilibria that vary in their provision of liquidity, we discuss the relationship between liquidity, interest rates, and output. Our preliminary results suggest that expansionary open market operations are associated with higher nominal interest rates and an increased economic activity.

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Redistributional Effects of Monetary Policy in a Search-Theoretic Model of Money

Traditional models of money search rely on assuming quasi-linear preferences for tractability purposes. Despite this assumption being useful to obtain analytical results, it prevents the model of giving any insight on the distributional consequences of policies or additional frictions, something that might seem overly simplifying in an environment in which heterogeneity is a direct byproduct of decentralized trading. In this paper, I relax the quasi-linearity assumption with the idea of accounting for the potential distributional effects of monetary policy. In particular, I show that larger levels of inflation are associated with lower economic activity and higher price dispersion in the stationary equilibrium. I also compute the short-run response of the economy to temporary monetary shocks and discuss why the presence of intertemporal heterogeneity in the distribution of money holdings can generate non-neutralities and sluggish responses of prices in decentralized markets to changes in the monetary policy.

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Counter-Cyclical Credit Standards and Business Cycle Fluctuations

The most recent financial crisis has stressed the importance of understanding the interaction between credit market imperfections and macroeconomic fluctuations. Credit standards, i.e. all factors other than the interest rate that are specified in debt contracts, are an important feature of credit markets and are aimed to attenuate the informational problems that arise between lenders and borrowers. Empirical evidence regarding the counter-cyclical and systematic variation in credit standards suggest that these non-price factors in debt contracts can play a critical role when financial intermediaries are tailoring their supply of credit. This has not only to do with access to credit but also with the characteristics of the pool of borrowers. Such behavior in credit markets has the potential of generating larger and more prolonged recessions and increasing capital misallocation after a sharp tightening in credit standards. I propose a general equilibrium model with firm heterogeneity and financial frictions in which firms can issue defaultable debt. The price of such debt is affected by two major credit market characteristics: the lender’s perceptions about borrower’s probability of default and the capital recovery rate (the fraction of the depreciated capital that can be seized in case of default). Here, the information asymmetry between lenders and borrowers generates inefficiencies in the allocation of credit that are then amplified for lower levels of the recovery rate. In this context, a low recovery rate reduces the availability of credit and raises capital misallocation. I use this model to investigate the dynamic effect of a transitory contraction in the recovery rate on credit markets and macroeconomic fluctuations.

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Published Papers

Countercyclical Reserve Requirements in a Heterogeneous-Agent and Incomplete Financial Markets Economy

Journal of Macroeconomics (2015), Vol. 46: 55–70. (with Franz Hamann)

For a long time reserve requirements fell into disuse as a countercyclical monetary policy tool. Recently, while developed countries struggled to deal the financial crisis, several emerging countries resorted to them as part of the macroprudential policy toolkit. The apparent success of such non-conventional instruments in mitigating business cycle fluctuations raises the question whether they deserve full credit for that or some merit should be given to conventional instruments, like short-term interest rates. To answer this question, we use a dynamic stochastic general equilibrium model with risk-averse financial intermediaries, heterogeneous agents facing uninsurable idiosyncratic risk and a central bank that implements countercyclical policy using two instruments: short-term rates and reserve requirements. In this environment, in which agents’ wealth matters for their consumption and savings decisions, we find that using reserve requirements as a countercyclical tool marginally helps to reduce the consumption volatility and that its effect becomes quantitatively relevant only if banks are sufficiently risk averse. Two factors drive our results: the presence of interest rate risk and the imperfect substitution between bank liabilities.

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Race as Determinant on the Access of a Job of Quality: A Study for Cali

Ensayos sobre Política Económica (ESPE) (2008), Vol. 26, No. 57: 130–175. (with Santiago Arroyo)

Labor discrimination by race has been a subject widely analyzed in labor economics, but the influence of this factor on the probability of accessing a good-quality job has not been explored or tested enough. This analysis is of vital importance for a city like Cali and its metropolitan area, since it has the largest share of black population in Colombia; according to the 2005 Census, 26% of its inhabitants are black. In this document we test the hypothesis that race affects job quality using a generalized ordered logit model. The results show that being a black worker in Cali increases the probability of having a bad quality job during the second quarter of 2004 by 12.2%.

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Working Papers

Constant-interest-rate projections and its indicator properties

Borradores de Economia, Banco de la República (2012), No. 696. (with Luis E. Rojas)

This paper propose indicator variables for the implementation of monetary policy in an inflation targeting regime. Using constant interest rate projections, the notion of a target-compatible interest rate is presented. This variable allows to extract some characteristics that the expected future path of the interest rate have to fulfill in order to be compatible with the target. The specific formulation of the target-compatible interest rate is presented under alternative assumptions over the forecasting horizon (unconditional or conditional forecasts) and the objective of the monetary authority (inflation target or a loss function). The empirical counterpart of the various formulations is shown using a DSGE model for Colombia; a small open economy with an inflation targeting regime.

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