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Working Paper
Institutional causes of macroeconomic volatility
In this paper we investigate the relation between the quality of institutions and macroeconomic volatility. Using instrumental variable regressions, we show that higher barriers to entry lead to higher volatility. In particular, a one standard deviation increase in entry costs increases the standard deviation of output growth by roughly 40% of its average value in our sample. To the contrary, property rights protection has no statistically significant effect on volatility.
Working Paper
Externalities, Endogenous Productivity, and Poverty Traps
We present a version of the neoclassical model with an endogenous industry structure. We construct a distribution of firms? productivity that implies multiple steady-state equilibria even with an arbitrarily small degree of increasing returns to scale. While the most productive firms operate across all the steady states, in a poverty trap less productive firms operate as well. This results in lower average firm productivity and total factor productivity. The distributions of employment by firm size across steady states are consistent with the empirical observation that poor countries have a ...
Working Paper
Cross-country income convergence revisited
We reassess the convergence properties of the cross-country distribution of income and its determinants using the dataset constructed by Klenow and Rodriguez-Clare (2005) and our updated version of the same data. Consistent with the literature, the ergodic distribution of output per worker features separate convergence clubs. In contrast to previous findings, productivity display convergence in the long-run. The long-run distribution of human capital is multi-modal.
Working Paper
Optimal monetary policy, endogenous sticky prices and multiplicity of equilibria
We analyze optimal discretionary monetary policy in an endogenous sticky prices model. Similar models with exogenous sticky prices can deliver multiple equilibria. This is a necessary condition for the occurrence of expectation traps (when private agents? expectations determine the equilibrium level of inflation). In our model, sticky price firms are allowed to switch to flexible pricing by paying a random cost. For plausible parametrizations, our model has a unique low-inflation equilibrium. With endogenous sticky prices, the monetary authority does not validate high-inflation expectations ...
Journal Article
Institutional causes of output volatility
The authors investigate the relationship between the quality of institutions and output volatility. Using instrumental variable regressions, they address whether higher entry barriers and lower property rights protection lead to higher volatility. They find that a 1-standard-deviation increase in entry costs increases the standard deviation of output growth by roughly 40 percent of its average value in the sample. In contrast, property rights protection has no statistically significant effect on volatility.
Working Paper
Heterogeneous firms, productivity and poverty traps
We present a model of endogenous total factor productivity which generates poverty traps. We obtain multiple steady-state equilibria for an arbitrarily small degree of increasing returns to scale. While the most productive firms operate across all the steady states, in a poverty trap less productive firms operate as well. This results in lower average firm productivity and lower total factor productivity. In our model a growth miracle is accompanied by a shift of employment from small to large firms, consistent with the empirical evidence. We calibrate our model and relate entry costs to the ...
Working Paper
Entry costs, misallocation, and cross-country income and TFP differences
Entry costs vary dramatically across countries. To assess their impact we construct a model with endogenous entry and operation decisions by firms and calibrate it to match the U.S. distribution of firms by age and size. Higher entry costs lead to greater misallocation of productive factors and lower TFP and output. In the model, countries with entry costs in the lowest decile of the distribution have 2.32 times higher TFP (3.43 in the data) than countries in the highest decile. As in the data, higher entry costs are associated with higher mean and variance of the employment distribution ...