Browse the categories to access the content of academic, scientific and opinion publications of the professors and students of the Department of Economics PUC-Rio.

ℓ1-regularization of high-dimensional time-series models with non-Gaussian and heteroskedastic errors

The Journal of Econometrics

V 191, N 1, P 255-271, 17/03/2016

We study the asymptotic properties of the Adaptive LASSO (adaLASSO) in sparse, high-dimensional, linear time-series models. The adaLASSO is a one-step implementation of the family of folded concave penalized least-squares. We assume that both the number of covariates in the model and the number of candidate variables can increase with the sample size (polynomially or geometrically). In other words, we let the number of candidate variables to be larger than the number of observations. We show the adaLASSO consistently chooses the relevant variables as the number of observations increases (model selection consistency) and has the oracle property, even when the errors are non-Gaussian and conditionally heteroskedastic. This allows the adaLASSO to be applied to a myriad of applications in empirical finance and macroeconomics. A simulation study shows that the method performs well in very general settings with t-distributed and heteroskedastic errors as well with highly correlated regressors. Finally, we consider an application to forecast monthly US inflation with many predictors. The model estimated by the adaLASSO delivers superior forecasts than traditional benchmark competitors such as autoregressive and factor models.

Marcelo Medeiros, Eduardo F. Mendes.

Capital controls in Brazil: effective?

Journal of International Money and Finance

V 61, P 163-187, 17/03/2016

A large theoretical literature emerged in recent years analyzing the positive and normative effects of capital controls, begging for empirical studies to validate it. No emerging market experimented as actively with controls on capital inflows as Brazil did since late 2009. This paper analyzes the impact of those measures. These policies had some success in segmenting the Brazilian from global financial markets, as measured by the spread between onshore and offshore dollar interest rates, as well as ADR premia relative to the underlying local stocks. The measures adopted from late 2009 to mid-2011 did not translate into significant changes in the exchange rate, suggesting limited success in mitigating exchange rate appreciation. However, the exchange rate strongly depreciates after a tax on the notional amount of derivatives is adopted in mid-2011. The last of the three restrictions studied may have depreciated the Brazilian real in the range from 4 to 10 percent. That strong response may have been driven by complementarities with the previous measures, as well as an unexpected easing in monetary policy.

Marcos Chamon, Márcio Garcia.

Nonlinearity, Breaks, and Long-Range Dependence in Time-Series Models

Journal of Business & Economic Statistics

V 34, N 1, P 23-41, 08/03/2016

An English auction is studied in which bidders can acquire information during the bidding process, allowing for heterogeneity both in ex-ante private information and the cost of information acquisition. The best response has a simple characterization where the optimal information acquisition time is unaffected by the other bidders’ strategies. We prove the existence of an equilibrium in a novel way by characterizing it as a fixed point in the space of bid distributions rather than the space of bid functions. Furthermore, we show that when bidders have homogeneous ex-ante private information about valuations: (1) The English auction generates more revenue than the Vickrey auction when the number of bidders is sufficiently large; and (2) the English auction is more efficient than the Vickrey auction when the information acquisition cost are relatively small. We present numerical simulations that show that these effects can be large. Our findings provide an additional explanation for the popularity of the English auction, even in settings where the bidders’ valuations are independent

Eric Hillebrand, Marcelo Medeiros.

Demographics and Real Interest Rates: Inspecting the Mechanism

European Economic Review

V 88, P 208+226, 26/02/2016

The demographic transition can affect the equilibrium real interest rate through three channels. An increase in longevity or expectations thereof puts downward pressure on the real interest rate, as agents build up their savings in anticipation of a longer retirement period. A reduction in the population growth rate has two counteracting effects. On the one hand, capital per-worker rises, thus inducing lower real interest rates through a reduction in the marginal product of capital. On the other hand, the decline in population growth eventually leads to a higher dependency ratio (the fraction of retirees to workers). Because retirees save less than workers, this compositional effect lowers the aggregate savings rate and pushes real rates up. We calibrate a tractable life-cycle model to capture salient features of the demographic transition in developed economies, and find that its overall effect is a reduction of the equilibrium interest rate by at least one and a half percentage points between 1990 and 2014. Demographic trends have important implications for the conduct of monetary policy, especially in light of the zero lower bound on nominal interest rates. Other policies can offset the negative effects of the demographic transition on real rates with different degrees of success

Carlos Viana de Carvalho, Fernanda Feitosa Nechio, Andrea Ferrero.

Inflation Targeting with Imperfect Information

International Economic Review

V 57, N 1, P 255-270, 17/02/2016

In a global games setup with imperfect commitment technology, we show that low targets—the ones close to the optimal inflation under perfect commitment—are unattainable, leading to a trade-off between low and credible targets. Moreover, since noisy public information helps to coordinate expectations around the announced target, our article supports unconventional policy prescriptions. First, weaker countries need to impose higher targets. Second, less transparency helps to make the announced target credible and then reduces the optimally announced target. Results are based on a general central bank loss function encompassing models traditionally used to discuss central bank decisions.

Rafael Santos, Tiago Couto Berriel, Aloisio Araújo.

When (and How) to Favor Incumbents in Optimal Dynamic Procurement Auctions

Journal of Mathematical Economics

V 62, P 52-61, 17/02/2016

We consider the problem faced by a benevolent government agency that procures in each of image periods an indivisible good from one of image firms. The procurement process is complicated by the superior information possessed by firms about their time-varying production costs and efficiency-enhancing efforts. We fully characterize the optimal dynamic procurement. To reduce firms’ informational rents, the government introduces distortions along two dimensions: when selecting from which firm to procure the good and when providing incentives toward efforts in cost reduction. Both distortions interact in a non-trivial way. Firms that draw lower cost parameters in the first period are favored in the selection process in all later periods, which allows for the provision of more powerful incentives.

Paulo Orenstein, Vinicius Nascimento Carrasco, Pablo Hector Seuanez Salgado.

Is the convergence of the manufacturing sector unconditional?


V 16, N 3, P 273–294, 08/09/2015

Em Unconditional Convergence, Rodrik (2011b), documentou que industrias do setor de manufaturas possuem convergência incondicional da produtividade do trabalho. Neste artigo nós propomos um modelo semi-paramétrico para equações de convergência e mostramos que a velocidade de convergência muda sistematicamente com características específicas dos países estudados. Nós consideramos um modelo flexível de transição suave e com múltiplas variáveis de transição. Nós encontramos evidências que as leis do movimento para o crescimento na produtividade da indústria é diferente nos países

Marcelo Medeiros, Juliano Assunção, Priscilla Burity.

Deforestation slowdown in the Brazilian Amazon: prices or policies?

Environment and Development Economics

V 20, N 6, P 697-722, 24/08/2015

This paper investigates the contribution of agricultural output prices and policies to the reduction in Amazon deforestation in the 2000s. Based on a panel of Amazon municipalities from 2002 through 2009, we first show that deforestation responded to agricultural output prices. After controlling for price effects, we find that conservation policies implemented beginning in 2004 and 2008 significantly contributed to the curbing of deforestation. Counterfactual simulations suggest that conservation policies avoided approximately 73,000 km2 of deforestation, or 56 per cent of total forest clearings that would have occurred from 2005 through 2009 had the policies adopted beginning in 2004 and 2008 not been introduced. This is equivalent to an avoided loss of 2.7 billion tonnes of stored carbon dioxide

Juliano Assunção, Clarissa Costalonga e Gandour, Rudi Rocha.

Economic gains of realized volatility in the Brazilian stock market

Revista Brasileira de Finanças

V 12, N 3, P 319-349, 21/08/2015

This paper evaluates the economic gains associated with following a volatility timing strategy based on a multivariate model of realized volatility. To study this issue, we build a high frequency database with the most actively traded Brazilian stocks. Comparing with traditional volatility methods, we find that, when estimation risk is controlled, economic gains associated with realized measures perform well and increase proportionally to the target return. When expected returns are bootstrapped, however, performance fees are not significant, which is an indication that economic gains of realized volatility are offset by estimation risk.

Márcio Garcia, Marcelo Medeiros, Francisco Eduardo de Luna e Almeida Santos.

Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models

Journal of Monetary Economics

V 76, P 141-156, 20/08/2015

For a given frequency of price adjustment, monetary non-neutrality is smaller if older prices are disproportionately more likely to change. Selection for the age of prices provides a complete characterization of price-setting frictions in time-dependent models. Selection for older prices is weaker and non-neutralities are larger if the hazard function of price adjustment is less strongly increasing. Selection is weaker if there is heterogeneity in price stickiness. Finally, selection is weaker if durations of price spells are more variable. In particular, the Taylor (1979) model exhibits maximal selection for older prices, whereas the Calvo (1983) model exhibits no selection.

Felipe Schwartzman, Carlos Viana de Carvalho.

Price discovery in Brazilian FX markets

Brazilian Review of Econometrics

V 35, N 1, P 65-94, 13/04/2015

We study price discovery in the Brazilian Foreign Exchange (FX) markets and indicate which market (spot or futures) adjusts more quickly to the arrival of new information. We find that futures market dominates price discovery since it responds for 66.2% of the variation in the fundamental price shock and for 97.4% of the fundamental price composition, corroborating the result provided in previous studies that, in a unique world example, the exchange rate is formed in the futures market. In a dynamic perspective, the futures market is also more efficient since, when markets are subjected to a shock in the fundamental price, it is faster to recover to equilibrium. By computing price discovery according to calendar semesters, we find evidence of the correlation between price discovery metrics and market factors, such as spot market supply-demand disequilibrium, central bank interventions and institutional investors’ pressure.

Marcelo Medeiros, Márcio Garcia, Francisco Eduardo de Luna e Almeida Santos.

What if Brazil Hadn't Floated the Real in 1999?

Brazilian Review of Econometrics

V 35, N 2, 26/02/2015

We estimate a dynamic, stochastic general equilibrium model  for the Brazilian economy taking into account  the transition from a currency  peg to inflation  targeting that took place  in 1999. The estimated model exhibits quite different dynamic under the two monetary regimes. We use it to the produce counterfactual histories of  the transition from one regime to another, given estimated history of structural  shocks. Our results  suggest that the maintaining the currency peg would have been too costly, as interest  rates  would have  had  to remain at extremely high levels for several quarters, and  GDP  would  have  collapsed. Accelerating e the pace of nominal  exchange rate  devaluations  after  de  Asian Crisis would have lead to  higher inflation and  interest rates, and slightly lower GDP. Finally, the  first half of 1998 arguably provided a window of opportunity for a smooth transition between the two monetary regimes.

Carlos Viana de Carvalho, André Dornfeld Vilela .

Unobserved Heterogeneity In Regression Models: A Semiparametric Approach

Brazilian Review of Econometrics

V 35, N 1, P 47-63, 24/02/2015

This paper proposes a semiparametric approach to control for unobserved heterogeneity in linear regression models, based on an artificial neural network extremum estimator. We present a procedure to specify the model and use simulations to evaluate its finite sample properties in comparison to alternative methods. The simulations show that our approach is less sensitive to increases in the dimensionality and complexity of the problem. We also use the model to study convergence of per capita income across Brazilian municipalities.

Priscilla Burity, Juliano Assunção, Marcelo Medeiros.

Wage Differentials: Trade Openness and Wage Bargaining

Brazilian Review of Econometrics

V 34, N 1, P 3-23, 11/02/2015

Gustavo Gonzaga, Cristina Terra, Beatriz Cristina Muriel Hernández.

Structure and Asymptotic Theory for Nonlinear Models with GARCH Errors


V 16, N 1, P 1-21, 22/01/2015

Nonlinear time series models, especially those with regime-switching and/or conditionally heteroskedastic errors, have become increasingly popular in the economics and finance literature. However, much of the research has concentrated on the empirical applications of various models, with little theoretical or statistical analysis associated with the structure of the processes or the associated asymptotic theory. In this paper, we derive sufficient conditions for strict stationarity and ergodicity of three different specifications of the first-order smooth transition autoregressions with heteroskedastic errors. This is essential, among other reasons, to establish the conditions under which the traditional LM linearity tests based on Taylor expansions are valid. We also provide sufficient conditions for consistency and asymptotic normality of the Quasi-Maximum Likelihood Estimator for a general nonlinear conditional mean model with first-order GARCH errors.

Marcelo Medeiros.

Financial constraints, endogenous educational choices and self-selection of migrants

Brazilian Review of Econometrics

V 33, N 1, 08/10/2014

The Roy model predicts that migrants will be disproportionately drawn from the lower

half of the educational distribution of the sending country if the sending country has

a higher return to schooling. However, Mexican immigrants in the U.S. tend to be

disproportionately drawn from the middle of the distribution. We argue that nancial

constraints may explain why. We study migrants' selectivity when agents that face credit

constraints make joint decisions about how much to invest in education and whether

to migrate. Our results show that nancial constraints can explain the intermediate

selection of migrants observed in the data.

Juliano Assunção, Leandro Siqueira Carvalho.

Nonlinear error correction models with an application to commodity prices

Brazilian Review of Econometrics

V 33, N 2, P 145-170, 02/10/2014

Existing tests for nonlinearity in vector error correction models are highly intensive computationally

and have nuisance parameters in the asymptotic distribution, what calls for

cumbersome bootstrap calculations in order to assess the distribution. Our work proposes

a consistent test which is implementable in any statistical package and has Chi-Squared

asymptotics. Moreover, Monte Carlo experiments show that in small samples our test

has nice size and power properties, often better than the preexisting tests. We also provide

a condition under which a two step estimator for the model parameters is consistent

and asymptotically normal. Application to international agricultural commodities prices

show evidence of nonlinear adjustment to the long run equilibrium on the wheat prices.


Marcelo Medeiros, Rafael Ribeiro Magri.

Parametric Portfolio Selection: Evaluating and Comparing to Optimistic Markowitz Portfolios

Revista Brasileira de Finanças

V 12, N 2, P 257-284, 25/08/2014

In this paper we exploit the parametric portfolio optimization in the Brazilian market. Our data consists of monthly returns of 306 Brazilian stocks in the period between 2001 and 2013. We tested the model both in and out of sample and compared the results with the value and equal weighted portfolios and with a Markowitz based portfolio. We performed statistical inference in the parametric optimization using bootstrap techniques in order to build the parameters empirical distributions. Our results showed that the parametric optimization is a very efficient technique out of sample. It consistently showed superior results when compared with the VW, EW and Markowitz portfolios even when transaction costs were included. Finally, we consider the parametric approach to be very flexible to the inclusion of constraints in weights, transaction costs and listing and delisting of stocks.

Gabriel Vasconcelos, Marcelo Medeiros, Artur Manoel Passos.

The effects of exposure to hyperinflation on occupational choice

Journal of Economic Behavior and Organization

V 106, P 109-126, 04/06/2014

We use data on immigrants who live in the United States to study the effects of exposure to hyperinflation on occupational choice. To do so, we calculate the number of years an individual had lived under hyperinflation before arriving to the US. We find that its marginal effect on the probability of being self-employed instead of wage-earner is 0.87 percentage point. This finding suggests that the macroeconomic environment one lives in permanently affects his economic behavior. The estimated effect depends on the age individuals had when exposed to hyperinflation. In particular, it vanishes for those over the age of 40.

Eduardo Zilberman, João Manoel Pinho de Mello, Caio Waisman.

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