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Journal Article
A historical look at the labor market during recessions
Martinez-Garcia, Enrique; Koech, Janet (2010)
Turmoil in housing, credit and financial markets plunged the U.S. economy into a recession that has taken a heavy toll on the labor market. The weakness that began during the second half of 2007 gravely worsened during a period of extreme financial stress in 2008, and the labor market has yet to recover. To put the recession's labor-market impact into perspective, we compare the past two years to previous downturns, including the Great Depression. We also examine the data commonly used to assess labor market conditions. While unemployment rates and nonfarm payroll losses are widely reported, ...
Economic Letter , Volume 5

Working Paper
Understanding the Aggregate Effects of Credit Frictions and Uncertainty
Martinez-Garcia, Enrique; Balke, Nathan S.; Zeng, Zheng (2017-06-20)
We examine the interaction of uncertainty and credit frictions in a New Keynesian framework. To do so, uncertainty is modeled as time-varying stochastic volatitlity - the product of monetary policy uncertainty, financial risk (micro-uncertainty), and macrouncertainty. The model is solved using a pruned third-order approximation and estimated by the Simulated Method of Moments. We find that: 1) Micro-uncertainty aggravates the information asymmetry between lenders and borrowers, worsens credit conditions, and has first-order effects on real economic activity. 2) When credit conditions are ...
Globalization Institute Working Papers , Paper 317

Working Paper
Good Policies or Good Luck? New Insights on Globalization and the International Monetary Policy Transmission Mechanism
Martinez-Garcia, Enrique (2017-07-01)
The open-economy dimension is central to the discussion of the trade-offs that monetary policy faces in an increasingly integrated world. I investigate the monetary policy transmission mechanism in a two-country workhorse New Keynesian model where policy is set according to Taylor (1993) rules. I find that a common monetary policy isolates the effects of trade openness on the cross-country dispersion, and that the establishment of a currency union as a means of deepening economic integration may lead to indeterminacy. I argue that the common (coordinated) monetary policy equilibrium is the ...
Globalization Institute Working Papers , Paper 321

Working Paper
A redux of the workhorse NOEM model with capital accumulation and incomplete asset markets
Martinez-Garcia, Enrique (2011)
I build a symmetric two-country model that incorporates nominal rigidities, local-currency pricing and monopolistic competition distorting the goods markets. The model is similar to the framework developed in Martnez-Garca and Sndergaard (2008a, 2008b), but it also introduces frictions in the assets markets by restricting the financial assets available to two uncontingent nominal bonds in zero-net supply and by adding quadratic costs on international borrowing (see, e.g., Benigno and Thoenissen (2008) and Benigno (2009). The technical part of the paper contains three basic calculations. ...
Globalization Institute Working Papers , Paper 74

Working Paper
Assessing Bayesian model comparison in small samples
Wynne, Mark A.; Martinez-Garcia, Enrique (2014-08-01)
We investigate the Bayesian approach to model comparison within a two-country framework with nominal rigidities using the workhorse New Keynesian open-economy model of Martnez-Garca and Wynne (2010). We discuss the trade-offs that monetary policy characterized by a Taylor-type rule faces in an interconnected world, with perfectly flexible exchange rates. We then use posterior model probabilities to evaluate the weight of evidence in support of such a model when estimated against more parsimonious specifications that either abstract from monetary frictions or assume autarky by means of ...
Globalization Institute Working Papers , Paper 189

Journal Article
Consequences of the Euro: monetary union, economic disunion?
Grossman, Valerie; Martinez-Garcia, Enrique (2016-04)
Forming a monetary union brings the benefits of a shared currency but also?as the experience of the euro area shows in the years following the global financial crisis?significant costs associated with the loss of monetary policy independence and exchange rate flexibility.
Economic Letter , Volume 11 , Issue 2 , Pages 1-4

Working Paper
exuber: Recursive Right-Tailed Unit Root Testing with R
http://fedora:8080/fcrepo/rest/objects/authors/; Martinez-Garcia, Enrique; Pavlidis, Efthymios (2020-05-12)
This paper introduces the R package exuber for testing and date-stamping periods of mildly explosive dynamics (exuberance) in time series. The package computes test statistics for the supremum ADF test (SADF) of Phillips, Wu and Yu (2011), the generalized SADF (GSADF) of Phillips, Shi and Yu (2015a,b), and the panel GSADF proposed by Pavlidis, Yusupova, Paya, Peel, Martínez-García, Mack and Grossman (2016); generates finite-sample critical values based on Monte Carlo and bootstrap methods; and implements the corresponding date-stamping procedures. The recursive least-squares algorithm that ...
Globalization Institute Working Papers , Paper 383

Working Paper
A monetary model of the exchange rate with informational frictions
Martinez-Garcia, Enrique (2007)
Data for the U.S. and the Euro area during the post-Bretton Woods period shows that nominal and real exchange rates are more volatile than consumption, very persistent, and highly correlated with each other. Standard models with nominal rigidities match reasonably well the volatility and persistence of the nominal exchange rate, but require an average contract duration above 4 quarters to approximate the real exchange rate counterparts. I propose a two-country model with financial intermediaries and argue that: First, sticky and asymmetric information introduces a lag in the consumption ...
Globalization Institute Working Papers , Paper 02

Working Paper
Finite-Order VAR Representation of Linear Rational Expectations Models: With Some Lessons for Monetary Policy
Martinez-Garcia, Enrique (2016-09-01)
This paper considers the characterization via finite-order VARs of the solution of a large class of linear rational expectations (LRE) models. I propose a unified approach that uses a companion Sylvester equation to check the existence and uniqueness of a solution to the canonical (first-order) LRE model in finite-order VAR form and a quadratic matrix equation to characterize it decoupling the backward- and forward-looking aspects of the model. I also investigate the fundamentalness of the shocks recovered. Solving LRE models by this procedure is straightforward to implement, general in its ...
Globalization Institute Working Papers , Paper 285

Working Paper
Ties That Bind: Estimating the Natural Rate of Interest for Small Open Economies
Grossman, Valerie; Martinez-Garcia, Enrique; Wynne, Mark A.; Zhang, Ren (2019-03-31)
This paper estimates the natural interest rate for six small open economies (Australia, Canada, South Korea, Sweden, Switzerland and the U.K.) with a structural New Keynesian model using Bayesian techniques. Our empirical analysis establishes the following four novel findings: First, we show that the open-economy framework provides a better fit of the data than its closed-economy counterpart for the six countries we investigate. Second, we also show that, in all six countries, a monetary policy rule in which the domestic real policy rate tracks the Wicksellian domestic short-term natural rate ...
Globalization Institute Working Papers , Paper 359

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