Christian Bustamante

Working Papers

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.

Download draft.

Non-Degenerate and Persistent Distributions in Search-Theoretic Models 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.

Draft coming soon.


Work in Progress

Protectionism, International Trade, and Inequality

(with Heejeong Kim)

Global trade tensions have risen with the U.S. imposing 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. Protectionists policymakers argue that these workers have suffered from liberal trade policies that have reduced employment and wages in their domestic industries. We quantitatively evaluate the aggregate and welfare effects of increasing barriers to trade by extending the Eaton-Kortum (2002) model of Ricardian trade and developing a dynamic two-country, incomplete-markets framework with labor market frictions. In the model economy, workers are heterogeneous in both income and wealth. Workers, facing uninsurable income risk, work across a variety of sectors that produce different goods. Sectors vary in the extent of foreign competition faced by domestic producers. Workers can choose to move to another sector by paying a fixed cost. We quantitatively discipline our model to match the cross-sectional distributions of income and wealth as well as the bilateral trade distribution between the U.S. and Canada. In this framework, we first study the response of the U.S. and Canadian economies to tariff shocks, emphasizing their effect on the inequality and employment. We then analyze the welfare consequences of tariff changes on different households that vary in their income, wealth, the degree of trade exposure in the sector they work.

Show/Hide Abstract


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)

Show/Hide Abstract

Download paper | Download published paper.

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)

Show/Hide Abstract

Download paper.


Other Working Papers

Constant-interest-rate projections and its indicator properties

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

Show/Hide Abstract

Download paper.