This thesis is comprised of three articles. The first two investigate the relationship between monetary policy power and the prevalence of governmental credit (featuring interest rates that are insensitive to the monetary cycle) in the economy. The first shows that the available microeconometric evidence is not necessarily informative about the macroeconomic phenomenon of interest, as this depends not only on the average micro effect but also on external effects that capture general equilibrium forces. As an illustration it shows a simple New-Keynesian model with working capital credit, where (i) the macroeconomic effect is usually significantly weaker than the associated micro effect; and (ii) inflation becomes more responsive to monetary policy when governmental credit is present, as this mitigates the cost-channel. Giving sequence, the second article extends the analysis with a medium-sized DSGE model where governmental credit is used to finance the acquisition of physical capital by firms. Not relying on a cost-channel, it shows that under some calibrations the presence of governmental credit increases monetary policy power over inflation. The model is then estimated to Brazil using Bayesian techniques. The results suggest that monetary policy power is indeed reduced for both output and inflation, but more for the former than for the later, implying a lower sacrifice ratio. The estimated effects are small, nonetheless. The model is also used to show that the subsidized governmental credit is little effective in boosting steady-state aggregate investment as the government is unable to distinguish between investment projects that would or would not be done without subsidies.  Finally, the third article studies to what extent the effects of capital flows on a small open economy's business cycle depend on the type of the inflow (e.g., whether a bond or a stock inflow, a liability or an asset flow). For such it build an open economy New-Keynesian model with financial frictions. In a first general analysis it identifies direct mechanisms through which inflows may have differentiated effects depending or their type. It is shown how these differences have implications for the conduct of sterilized FX interventions. The relevancy of these mechanisms is then examined using a calibrated version of the model, and it is concluded that they are probably of little significance. 

We estimate the volatility of aggregate and sectoral shocks, as well as their contributions to business cycles fluctuations, using price setting data. The key idea is that sector-specific innovations are associated with the dynamics of price setting statistics, such as average size of price adjustments, within a single economic sector, while the volatility of aggregate disturbances can be inferred from the correlation of these statistics across different sectors. Therefore, price setting data provides useful information about the nature of economic fluctuations. We employ a rich price setting model in which firms face not only menu costs, but also informational frictions and estimate it using Simulated Method of Moments and data from the UK. We find that sectoral shocks are considerably more volatile than their aggregate counterparts.

Political corruption is widespread across many developing countries and it is considered a major impediment to economic development. But we have limited evidence on the effectiveness of anti-corruption policies. This chapter summarizes the extent to which government audits of public resources reduces corruption in the context of Brazils anti-corruption program that randomly audits municipalities for their use of federal funds.

We show that the pre-FOMC announcement drift in equity returns happens mostly in periods of high market uncertainty/volatility. More precisely, this abnormal return is explained by a significant reduction in risk premium prior to the announcement in periods of high market volatility. We also show that the relevant measures of uncertainty/volatility are persistent and are not related to policy uncertainty or policy expectations. Markets do not become stressed in the days prior the announcement and the uncertainty resolution is not reversed in the days after the meeting either. The relation between market uncertainty and pre-FOMC drift in equity returns is robust to different samples and to alternative measure of uncertainty or risk premium.

M403

A incerteza é um fator relevante na modelagem de variáveis macroeconômicas, especialmente em países emergentes. Neste estudo, tentamos entender se medidas de incerteza oriundas do mercado brasileiro podem melhorar as projeções de PIB do país. Traçando uma curva IS da forma mais simples possível: relacionando o hiato do produto a suas primeiras defasagens e aos juros reais ex-ante, podemos adicionar medidas de incerteza e atestar se estas melhoram as projeções de hiato realizadas para o período imediatamente subsequente. Como medidas de incerteza, utilizamos a dispersão de expectativas do boletim Focus para PIB e inflação; a volatilidade implícita dos contratos futuros de câmbio; o VIX; a volatilidade observada nas empresas mais relevantes do índice Bovespa e o Índice de Incerteza Econômica (IIE-Br). Conseguimos demonstrar com um exercício de backtest que a previsão de hiatos do PIB se torna melhor com a inclusão de variáveis de incerteza na curva IS.

We propose a model to forecast very large realized covariance matrices of returns, applying it to the constituents of the S&P 500 on a daily basis. To deal with the curse of dimensionality, we decompose the return covariance matrix using standard firm-level factors (e.g. size, value, profitability) and use sectoral restrictions in the residual covariance matrix. This restricted model is then estimated using Vector Heterogeneous Autoregressive (VHAR) models estimated with the Least Absolute Shrinkage and Selection Operator (LASSO). Our methodology improves forecasting precision relative to standard benchmarks and leads to better estimates of the minimum variance portfolios.

M404

I develop an entrepreneurship model with occupational choices in an environment where agents face binding credit restrictions. I show that in economies where financial markets are tighter, the distribution of wealth is characterized by higher levels of inequality. The model is consistent with documented results in the literature concerning losses in TFP and other aggregate outcomes. I also analyze the transition dynamics of the wealth distribution in the aftermath of a once-and-for-all credit crunch shock and show that wealth accumulation might mitigate the misallocation implied by such adverse shocks.

M405

While structural change literature has been mainly focused on explaining the Kuznets Facts - a set of regularities concerning sectoral dynamics throughout economic growth - important issues were left apart. Inequality was one of them: Kuznets himself, when making some of the first documentation of structural change patterns, repetitively expressed his concern that inequality and sector reallocation were linked. In this regard, we seek to extend the benchmark model of structural change to introduce wealth and income distribution. We allow idiosyncratic risky and incomplete markets in a two-sector environment of growth. In a quantitative exercise, a secular transition from a poor and good's producer economy to a richer and service-based one is conducted. We establish how a time-varying relative price of consumption and investment - yielded by the model's multi-sector structure - plays an important role in the inequality behavior. Watching a rising trend for this relative price, agents allocate more consumption to the beginning of the transition. With the subsequent rise in interest rates and the lower accumulation of capital, inequality soars within this period. We also show that, when workers may be restricted to switch sectors, income inequality jumps during the first years, while wealth inequality actually becomes smaller than in the frictionless case. Finally, we calibrate the model based on the US economy 1950-2000, obtaining a good fit for sectoral shares, and a reasonable fit for income Gini percent variations. Our consumption-investment relative price effect on inequality does not explain the rise in the Gini index after the 1980s.

The literature on economic development emphasized that historical events have long-term persistence over current social welfare. Specifically, places with historical state capacity are more developed than places without it. In this paper, we focus on how rule of law presence, one crucial dimension of state capacity, affects the dynamics and structure of firms. Therefore, we focus on one mechanism through which state capacity affects development. This relationship is analyzed for the Peruvian case. We use rich data from the national tax collector, the national economic census and a historical census of the state administration carried in 1793 to analyze the persistent effect of rule of law presence over firms’ development indicators. Our baseline results present evidence of a persistent and significant positive effect of the historical presence of rule of law over formalization, firm’s size and labor productivity; also, we find that firms prefer to relate each other through markets rather than adopt vertical structures in places with historical presence of rule of law. Our evidence is robust to the addition of important historical socioeconomic variables and the exclusion of Lima. Furthermore, the presence of courts appears to be the most important dimension of rule of law presence. Second, we analyze the effect of the historical presence of rule of law over the current presence of rule of law as a potential channel of persistence. We argue that having rule of law institutions in the colonial period affected the relative cost of subsequent investments in state capacity held during the republic period. Our findings are robust to alternative specifications (IV model and network framework). Finally, we present preliminary evidence on mechanisms. Municipalities with historical presence of rule of law have loosened financial frictions, demand less informal credit and have better conditions to obtain a functioning license. These results suggest that informal and formal rules may evolve differently and that the cost of access to rule of law-related services is important.

M402

A three-sector model with a suitably chosen distribution of price stickiness can closely approximate the response to aggregate shocks of New Keynesian models with a much larger number of sectors, allowing for their estimation at much reduced computational cost.

How countercyclical macroprudential credit policies affect the interest rate spread? To answer this question, we propose a banking completion model. We use data from Brazil, where government-owned banks whose outstanding loans accounted for almost half of the credit market, but also have played a strong countercyclical role in the economy. In our model, we build upon Cournot banking competition models in order to consider the differences in behavior between public and private loans, as well as to distinguishing features observed between firms and consumers credit market. Our results show that the presence of counter-cyclical public credit reduces the spread when the risk in the economy is high but, on the other hand, reduces the supply of credit provided by private banks not just through the conventional quantity channel of Cournot competition, but also by lowering the risk premium faced by the banks in credit market, which intensifies the retraction in private credit supply in economic downturns.

M401

This article examines the effects of bank privatization on the number of bank branches operating in small isolated markets in Brazil. We estimate a dynamic game played between Brazilian public and private banks. We find private banks compete with each other as expected. We also find public banks generate positive spillovers for private banks. Our counterfactual study shows that privatization substantially reduces the number of banks. The government can mitigate the effects of privatization by providing subsidies to private banks. Our model predicts subsidy policies that reduce operating costs are more cost‐effective than entry costs for isolated markets in Brazil.

This work analyses the presence of peer effects in the Brazilian Congress among federal deputy. I test if a deputy is influenced by its nextdoor neighbor when casting a vote for a proposition. Since politicians can select colleagues with similar political position to be their neighbors, I use an office lottery that randomly allocates offices for newcomers and test if office proximity increases the likelihood of agreement. I use data for all 1026 Brazilian federal deputies from 54th and 55th legislature elected in 2010 and 2014 and observe their votes in all propositions held between February 2011 and May 2017. I find that being next-door office neighbors does not increase the probability of agreement. Similar findings are obtained when restricting the sample for different types of proposition, for deputies from the same party, as well as for congressmen from the same state.

A measure of the propensity to gamble in casinos constructed without any asset price data provides relevant information for asset pricing. This measure of risk appetite improves the fit of conditional asset pricing models such as the conditional CAPM, explains cross-sectional differences in future returns for portfolios sorted on various characteristics, and helps forecast market and portfolio excess returns. The relationship between risk appetite and asset prices appears to be mainly explained by simultaneous changes in risk and risk premia