Christian Bustamante

Using a general equilibrium search-theoretic model of money, I study the long-run distributional effects of monetary policy. In my model, heterogeneous agents trade bilaterally in a frictional market and save using cash and illiquid short-term nominal government bonds. Wealth effects generate slow adjustments in agents’ portfolios following their trading activity in decentralized markets, giving rise to a persistent and non-degenerate distribution of assets. The model reproduces the distribution of asset levels and portfolios across households observed in the data. I show that, as wealth inequality increases the incidence of inefficiencies in decentralized trading, policies that improve the ability to self-insure against idiosyncratic shocks are welfare-improving and redistribute resources towards agents that are relatively poor and more liquidity constrained.

We measure the contribution to inflation from the growth in markups of Canadian firms. The dynamics of inflation and markups suggest that changes in markups could account for less than one-tenth of inflation in 2021. Further, they suggest that peak inflation was driven primarily by changes in the costs of firms.

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.

This paper explores why conventional monetary policy was insufficient in mitigating the severity of the 2007 U.S. recession and unsuccessful thereafter in stimulating the economic recovery. Using a quantitative model alongside firm-level data, I show that accounting for individual firms’ debt structures is crucial in explaining why business investment fell so dramatically through the recession and remained low for several years despite the Federal Reserve repeatedly cutting its target interest rate until conventional policy tools were exhausted. Using a sample of publicly traded firms, I establish that firms with greater long-term debt exposure experienced larger contractions and slower recoveries in their investment. Next, I show that debt overhang episodes were unusually prevalent over the years following the onset of the recession, and particularly so among firms relying more heavily on long-maturing debt.
I develop a New Keynesian model where heterogeneous firms finance investment using defaultable long-term nominal debt, and a central bank faces an explicit zero lower bound constraint on the short-term nominal interest rate, to understand these microeconomic observations and their implications for aggregate fluctuations. In the model, the greater a firm’s leverage, the higher its likelihood of experiencing a debt overhang episode following a large aggregate shock. The incidence of debt overhang episodes reduces investment in 6 percentage points in the stationary equilibrium and contributes by itself an additional 3.5 percentage points in further slowing the pace at which investment recovers following a financial shock that resembles the Great Recession. Furthermore, these debt overhang problems compound with (1) debt deflation, and (2) the monetary authority’s inability to restore inflation once nominal interest rates reach the zero lower bound. Together, firms’ long-maturity debt positions and the binding zero lower bound are critical in transmitting the consequences of a deep recession into a remarkably anemic recovery in aggregate investment.

Monetary policy changes bring redistributive consequences. This paper investigateshow these redistributive effects vary across wealth and age groups and how persistent they are. We build a heterogeneous agent New Keynesian overlapping generations (HANK-OLG) model where households can save in liquid and illiquid assets. The model also allows various fiscal responses to monetary surprises and isolates households’ responses to a monetary policy shock from adjustments in transfers, taxes, or government spending. We find that an expansionary monetary policy shock benefits younger households the most as the increased aggregate economic activity boosts their labor income. In contrast, older households whose primary income source is capital income suffer from a fall in the return of liquid assets while being limited in their ability to take advantage of higher wages.

During periods of tightening, monetary policy can have differential impacts on households' credit balances and subsequently on consumption. Using Canadian micro-data, we document that monetary tightening has strongly negative implications for housing-secured borrowing. The strength of the effect increases in credit risk with the weakest effect for consumers with low credit risks and the strongest for those with high ones. To better disentangle the drivers behind the heterogeneous impact and to assess the aggregate implications, we develop a New Keynesian heterogeneous agent lifecycle model with housing and risky mortgages.

Global trade tensions have risen with the U.S. imposition of tariffs on goods imported from several of its trade partners. When increasing trade barriers, policy-makers intend to boost domestic demand and employment, improving the welfare of domestic workers in import-intensive sectors. We develop a model within which to quantitatively evaluate the aggregate and welfare effects of increased barriers to trade, embedding the Eaton-Kortum (2002) model of Ricardian trade within a dynamic two-country, incomplete-markets framework with labor market frictions. Workers in our model economy are heterogeneous in both income and wealth. They face uninsurable income risk and work across a variety of sectors producing different goods. Sectors vary in the extent of foreign competition faced by domestic producers. Workers can choose to move to another sector, but incur fixed costs to do so. The model is quantitatively disciplined by a rich set of moments drawn from the cross-sectional distributions of income and wealth, alongside the bilateral trade distribution between the U.S. and Canada. Using this environment, we first study the responses of the U.S. and Canadian economies to tariff shocks, emphasizing their effects on inequality and employment. Next, we analyze the welfare consequences of tariff changes on different households as functions of their income, wealth and the degree of trade exposure in the sector they work.

We measure the contribution to inflation from the growth in markups of Canadian firms. The dynamics of inflation and markups suggest that changes in markups could account for less than one-tenth of inflation in 2021. Further, they suggest that peak inflation was driven primarily by changes in the costs of firms.

The rich economic diversity of businesses and households has an impact on economy-wide fluctuations and, in turn, is shaped by these fluctuations. This view, which has emerged over the last decade, has strong implications for both the conduct of monetary policy and its transmission mechanism. Our thematic review focuses on key aspects of this new theory as well as its underlying assumptions. We place these insights in a Canadian context, using relevant micro and macroeconomic data.

This paper proposes 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.

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%.