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.

Britain as a debtor: Indian sterling balances, 1940-1953

The Economic History Review

V 70, N 2, P 586–604, 20/04/2017

The British war effort in the Second World War depended on US Lend-Lease and the accumulation of sterling balances by other countries, including the Empire. By the end of the war outstanding balances were equivalent to 60 per cent of British net receipts under Lend-Lease. Of the total sterling balances, about a third was accumulated by India. This article seeks to evaluate the costs incurred by India in the reduction of balances after the war. The accumulation of balances and their use to repatriate India's sterling debt is described. British efforts to convince India to accept a partial cancellation of the balances are analysed, singling out the crucial role of Keynes. The negotiations after independence are detailed, including releases, transfers to Pakistan, settlement of pensions, purchase of military stores, and gold sales. The possible contribution of British divestment to reduce outstanding balances is assessed. The Indian case is compared with those of other holders, such as Portugal, Brazil, Argentina, and Egypt. The links between the accumulation of sterling balances and inflation are considered. In the end there was a significant reduction in the purchasing power of sterling balances, but not for the reasons anticipated by London.

Marcelo de Paiva Abreu.

Real-Time Inflation Forecasting with High-Dimensional Models: The Case of Brazil

International Journal of Forecasting

V 33, N 3, P 679–693, 08/03/2017

We show that high-dimensional econometric models, such as shrinkage and complete subset regression, perform very well in the real-time forecasting of inflation in data-rich environments. We use Brazilian inflation as an application. It is ideal as an example because it exhibits a high short-term volatility, and several agents devote extensive resources to forecasting its short-term behavior. Thus, precise forecasts made by specialists are available both as a benchmark and as an important candidate regressor for the forecasting models. Furthermore, we combine forecasts based on model confidence sets and show that model combination can achieve superior predictive performances.

Gabriel Vasconcelos, Marcelo Medeiros, Márcio Gomes Pinto Garcia.

Product Market Competition and the Severity of Distressed Asset Sales

Review of Finance

V 21, N 5, P 2007–2043, 01/01/2017

This article explores the effect of an industry’s market structure on the liquidation value of assets. We show that when firms with financial constraints compete for the gains arising from market concentration, they expend insufficient efforts to deploy assets across industries, leading to significant liquidation discounts when compared with an efficient benchmark. Equilibrium distress costs and private costs of leverage should increase with the rents linked to concentration in the product market

Vinicius Nascimento Carrasco, João Manoel Pinho de Mello, Pablo Hector Seuanez Salgado.

Climate Change and Agricultural Productivity in Brazil: Future perspectives

Environment and Development Economics

V 21, N 5, P 581-602, 04/12/2016

This paper evaluates the impact of climate change on agricultural productivity. Cross-sectional variation in climate among Brazilian municipalities is used to estimate an equation in which geographical attributes determine agricultural productivity. The Intergovernmental Panel on Climate Change (IPCC) predictions based on atmosphere-ocean, coupled with general circulation models (for 2030-2049), are used to simulate the impacts of climate change. Our estimates suggest that global warming under the current technological standards is expected to decrease the agricultural output per hectare in Brazil by 18 per cent, with the effects onmunicipalities ranging from -40 to +15 per cent. 

Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice and rising global average sea level. 

Flavia Chein, Juliano Assunção.

Factor specificity and real rigidities

Review of Economic Dynamics

V 22, P 208-222, 01/12/2016

We develop a multisector model in which capital and labor are free to move across firms within each sector, but cannot move across sectors. To isolate the role of sectoral specificity, we compare our model with otherwise identical multisector economies with either economy-wide or firm-specific factor markets. Sectoral factor specificity generates within-sector strategic substitutability and tends to induce across-sector strategic complementarity in price setting. Our model can produce either more or less monetary non-neutrality than those other two models, depending on parameterization and the distribution of price rigidity across sectors. Under the empirical distribution for the U.S., our model behaves similarly to an economy with firm-specific factors in the short-run, and later on approaches the dynamics of the model with economy-wide factor markets. This is consistent with the idea that factor price equalization might take place gradually over time, so that firm-specificity may serve as a reasonable short-run approximation, whereas economy-wide markets are likely a better description of how factors of production are allocated in the longer run.

Carlos Viana de Carvalho, Fernanda Feitosa Nechio.

Forecasting Macroeconomic Variables in Data-Rich Environments

Economics Letters

V 138, P 50–52, 10/11/2016

We show that high-dimensional models produce, on average, smaller forecasting errors for macroeconomic variables when we consider a large set of predictors. Our results showed that a good selection of the adaptive LASSO hyperparameters also reduces forecast errors

Gabriel Vasconcelos, Marcelo Medeiros.

Instrument selection for estimation of a forward-looking Phillips Curve

Economics Letters

V 145, P 123-125, 10/10/2016

We show that data-driven instrument selection based on the LASSOestimator can perform well comparative to the usual ad hoc instrument set for single equation estimation of a forward-looking Phillips Curve, when the overall identification condition is strong or in cases when the instruments are not very weak. We conclude that in face of model uncertainty and/or some potentially weak instruments within a large number of candidates, data-driven selection may provide a disciplined and more reliable estimation strategy.

Tiago Couto Berriel, Marcelo Medeiros, Marcelo Moura Jardim Teixeira Sena.

Detection and Estimation of Block Structure in Spatial Weight Matrix

Econometric Reviews

V 35, P 1347-1376, 10/10/2016

In many economic applications, it is often of interest to categorize, classify, or label individuals by groups based on similarity of observed behavior. We propose a method that captures group affiliation or, equivalently, estimates the block structure of a neighboring matrix embedded in a Spatial Econometric model. The main results of the Least Absolute Shrinkage and Selection Operator (Lasso) estimator shows that off-diagonal block elements are estimated as zeros with high probability, property defined as “zero-block consistency.” Furthermore, we present and prove zero-block consistency for the estimated spatial weight matrix even under a thin margin of interaction between groups. The tool developed in this article can be used as a verification of block structure by applied researchers, or as an exploration tool for estimating unknown block structures. We analyzed the U.S. Senate voting data and correctly identified blocks based on party affiliations. Simulations also show that the method performs well.

Pedro Carvalho Loureiro de Souza, Clifford Lam.

Audits or distortions : the optimal scheme to enforce self employment income

Journal of Public Economic Theory

V 18, N 4, P 511-544, 15/07/2016

I investigate the optimal auditing scheme for a revenue-maximizing tax collection agency that observes not only reported profits, but also a single factor of production at each firm. Each firm is owned by a single entrepreneur whose managerial ability is random. The optimal auditing scheme is discontinuous and nonmonotone in ability. In intermediate audit costs, less productive entrepreneurs face auditing probabilities that increase in ability, whereas the ablest ones are not audited. Finally, the effective tax rate is higher in the middle of the managerial ability distribution; thus, the overall regressive (or progressive) bias that arises from evasion is unknown.

Eduardo Zilberman.

The high frequency impact of macroeconomic announcements in the Brazilian futures markets

Brazilian Review of Econometrics

V 36, N 2, P 185-222, 20/04/2016

The estimation of the impact of macroeconomic announcements in the Brazilian futures markets is used to uncover the relationship between macroeconomic fundamentals and asset prices. Using intraday data from October 2008 to January 2011, we find that external macroeconomic announcements dominate price changes in the Foreign Exchange and Ibovespa markets, while the impact of the domestic ones is mainly restricted to Interest Rate contracts. We additionally propose an investment strategy based on the conditional price reaction of each market that achieved a success rate of 70% in an out-of-sample study. Finally, we document the impact on volume and bid-ask spreads.

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

How does Emigration affect Labor Markets? Evidence from Road Construction in Brazil

Brazilian Review of Econometrics

V 36, N 2, P 157-185, 20/04/2016

We study the impact of emigration on local labor markets, based on the construction of a 1,087km road in northeastern Brazil. The new road has changed population substantially, creating new cities along its path and increasing internal migration flows. We first use a reduced-form approach to estimate the effect of emigration on skill groups (defined by education and experience) - a 10 percentage point increase in the proportion of emigrants raises wages by 5%. Then, using a structural approach, we estimate cross effects among groups - although emigration typically raises wages, complementary effects determine negative impacts in some municipalities.

Flavia Chein, Juliano Assunção.

Forecasting Brazilian inflation with High-Dimensional Models

Brazilian Review of Econometrics

V 36, N 2, P 223-254, 20/04/2016

In this paper we use high-dimensional models, estimated by the Least Absolute Shrinkage and Selection Operator (LASSO), to forecast the Brazilian inflation. The models are compared to  benchmark specifications such as linear autoregressive (AR) and the factor models based on principal components. Our results showed that the LASSO-based specifications have the smallest errors for short-horizon forecasts. However, for long horizons the AR benchmark is the best model with respect to point forecasts. The factor model also produces some good long horizon forecasts in a few cases. We estimated all the models for the two most important Brazilian inflation measures, the IPCA and the IGP-M indexes. The results also showed that there are differences on the selected variables for both measures. Finally, the most important variables selected by the LASSO based models are, in general, related to government debt and money. On the other hand, variables such as unemployment and production were rarely selected by the LASSO.

Gabriel Vasconcelos, Eduardo H. de Freitas, Marcelo Medeiros.

A (semi-)parametric functional coefficient logarithmic autoregressive conditional duration model

Econometric Reviews

V 35, N 7, P 1221-1250 , 20/04/2016

In this article, we propose a class of logarithmic autoregressive conditional duration (ACD)-type models that accommodates overdispersion, intermittent dynamics, multiple regimes, and asymmetries in financial durations. In particular, our functional coefficient logarithmic autoregressive conditional duration (FC-LACD) model relies on a smooth-transition autoregressive specification. The motivation lies on the fact that the latter yields a universal approximation if one lets the number of regimes grows without bound. After establishing sufficient conditions for strict stationarity, we address model identifiability as well as the asymptotic properties of the quasi-maximum likelihood (QML) estimator for the FC-LACD model with a fixed number of regimes. In addition, we also discuss how to consistently estimate a semiparametric variant of the FC-LACD model that takes the number of regimes to infinity. An empirical illustration indicates that our functional coefficient model is flexible enough to model IBM price durations

Marcelo Fernandes, Marcelo Medeiros, Álvaro Veiga.

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 Gomes Pinto 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.

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.

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.

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