Working Paper Series

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.

Sentiment, Electoral Uncertainty and Stock Returns

N 655, 08/03/2017

We study the effect of a huge sports sentiment shock, unrelated to economic conditions or government actions, on stock market outcomes. After Brazil's 7-1 humiliating defeat to Germany in the 2014 World Cup, which is likely to be one of the largest sports sentiment shocks ever, the stock market went up. We provide evidence of two opposing effects on stock prices. One is the usual negative effect due to the investor sentiment channel documented in the literature. This effect was, however, overwhelmed by the arguably rational response of investors to voters' sentiment. In particular, the 7-1 defeat was perceived by stock market participants as a political shock affecting the upcoming close presidential election. To decompose these two effects, we devise an empirical strategy that allows us to compute the component of daily returns associated with political news. 

 Atualizado em agosto/2017


Carlos Viana de Carvalho, Eduardo Zilberman, Ruy Monteiro Ribeiro.

The Perils of Counterfactual Analysis with Integrated Processes

N 654, 27/12/2016

Recently, there has been a growing interest in developing econometric tools to conduct counterfactual analysis with aggregate data when a "treated" unit suffers an intervention, such as a policy change, and there is no obvious control group. Usually, the proposed methods are based on the construction of an arti cial counterfactual from a pool of "untreated" peers, organized in a panel data structure. In this paper, we investigate the consequences of applying such methodologies when the data are formed by integrated process of order 1. We find that without a cointegration relation (spurious case) the intervention estimator diverges resulting in the rejection of the hypothesis of no intervention effect regardless of its existence. Whereas, for the case when at least one cointegration relation exists, we have a √T-consistent estimator for the intervention effect albeit with a non-standard distribution. However, even in this case, the test of no intervention effect is extremely oversized if nonstationarity is ignored. When a drift is present in the data generating processes, the estimator for both cases (cointegrated and spurious) either diverges or is not well de ned asymptotically. As a fi nal recommendation we suggest to work in first-differences to avoid spurious results.

Carlos Viana de Carvalho, Marcelo Medeiros, Ricardo Pereira Masini.

Measuring the Effect of the Zero Lower Bound on Monetary Policy

N 649, 03/12/2016

The Zero Lower Bound (ZLB) on interest rates is often regarded as an important constraint on monetary policy. To assess how the ZLB affected the Fed's ability to conduct policy, we estimate the effects of Fed communication on yields of different maturities in the pre-ZLB and ZLB periods. Before the ZLB period, communication affects both shortand long-dated yields. In contrast, during the ZLB period, the reaction of yields to communication is concentrated in longer-dated yields. Our ndings support the view that the ZLB did not put such a critical constraint on monetary policy, as the Fed retained some ability to affect long-term yields through communication.

Eric Hsu, Carlos Viana de Carvalho, Fernanda Feitosa Nechio.

ARCO: An Artificial Counterfactual Approach from High-Dimensional Panel Time-Series Data

N 653, 16/08/2016

We consider a new method to estimate causal effects when a treated unit suffers a shock or an intervention, such as a policy change, but there is not a readily available control group or counterfactual. We propose a two-step approach where in the first stage an artificial counterfactual is estimated from a large-dimensional set of variables from pool of untreated units (“donors pool”) using shrinkage methods, such as the Least Absolute Shrinkage Operator (LASSO). In the second stage, we estimate the average intervention effect on a vector of variables belonging to the treated unit, which is consistent and asymptotically normal. Our results are valid uniformly over a wide class of probability laws. Furthermore, we show that these results still hold when the date of the intervention is unknown and must be estimated from the data. Tests for multiple interventions and for contamination effects are also derived. By a simple transformation of the variables of interest, it is also possible to test for intervention effects on several moments (such as the mean or the variance) of the variables of interest. Finally, we can disentangle the actual intervention effects from confounding factors that usually bias “before-and-after” estimators. A detailed Monte Carlo experiment evaluates the properties of the method in finite samples and compares our proposal with other alternatives such as the differences-in-differences, factor models and the synthetic control method. An empirical application to evaluate the effects on inflation of a new anti tax evasion program in Brazil is considered. Our methodology is inspired by different branches of the literature such as: the Synthetic Control method, the Global Vector Autoregressive models, the econometrics of structural breaks, and the counterfactual analysis based on macro-econometric and panel data models.

Carlos Viana de Carvalho, Marcelo Medeiros, Ricardo Pereira Masini.

Do Government Audits Reduce Corruption? Estimating the Impacts of Exposing Corrupt Politicians

N 652, 15/07/2016

Political corruption is considered a major impediment to economic development, and yet it remains pervasive throughout the world. This paper examines the extent to which government audits of public resources can reduce corruption by enhancing political and judiciary accountability. We do so in the context of Brazil’s anti-corruption program, which randomly audits municipalities for their use of federal funds. We find that being audited in the past reduces future corruption by 8 percent, while also increasing the likelihood of experiencing a subsequent legal action by 20 percent. We interpret these reduced-form findings through a political agency model, which we structurally estimate. Based on our estimated model, the reduction in corruption comes mostly from the audits increasing the perceived threat of the non-electoral costs of engaging in corruption.

Frederico Finan, Eric Avis, Claudio Ferraz.

Apprenticeship as a stepping stone to better jobs: evidence from brazilian matched employer-employee data

N 651, 07/06/2016

The objective of this paper is to evaluate the Brazilian Apprenticeship program (Lei do Aprendiz). This program is a youth-targeted ALMP that has been adopted at a large scale since 2000 in Brazil. The program concedes payroll subsidies to firms that hire and train young workers under special temporary contracts aiming to help them successfully complete the transition from school to work. We make use of a very rich longitudinal matched employee-employer dataset covering the universe of formally employed workers in Brazil, including apprentices. Our identification strategy exploits a discontinuity by age in the eligibility to enter the program in the early 2000’s, when 17 was the age limit to take part in the program. We examine the impacts on employability, wage growth and attachment to the formal labor market using other temporary workers as a control group. We find that the program increases the probability of employment in permanent jobs in 2-3- and 4-5-year horizons. We also find a positive impact on real wages that increases over time. These results hold when we isolate the effects of the training dimension of the program by using an alternative control group composed of subsidized temporary workers. We show evidence that the positive effects of the program are much larger for less-educated workers and for workers who had their first jobs in large firms. These results are robust to other choices of methods to address selection into the program based on unobservables.

Revisto em fevereiro de 2018

Carlos Henrique Corseuil, Gustavo Gonzaga, Miguel Nathan Foguel.

Is there an Output Free Lunch for Fiscal Inflationary Policies?

N 650, 29/04/2016

Expansionary fiscal policies have been advocated to induce output expansions and inflation in deep recession or deflationary episodes. We show that, in a fi scalist setup, an increase in defi cits can trigger a stagflation by negatively affecting financial intermediation of resources to investments. Financial intermediaries collect deposits to buy government bonds and lend through nominal long-term loans. When intermediaries face financial frictions and a maturity mismatch on their assets and liabilities, a surprise inflation and/or a revaluation of bonds prices impair their net-worth reducing lending, investments, and output. Recession comes with inflation in a fi scal expansion because the fall on capital triggered on the fi nancial sector rises production firms marginal costs. The probability of a recession is higher the greater is the maturity mismatch, the sensitivity of bonds prices to the policy rate, and the share of bonds on banks balances. These results: (1) give theoretical support for the negative relation documented between financial sector performance and inflation (2) help explaining high debt, highflination environments coinciding with banking crisis and, more importantly, (3) expose drawbacks of fiscal inflation policies proposed to inflate and stimulate low inflation economies, where the setup stressed in this paper is more probable to be present.

Moises Shalimay de Souza Andrade, Tiago Couto Berriel.

Demographics and Real Interest Rates: Inspecting the Mechanism

N 648, 16/03/2016

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 nd 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 e ects of the demographic transition on real rates with different degrees of success.

Carlos Viana de Carvalho.

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

N 647, 29/02/2016

We estimate a dynamic, stochastic, general equilibrium model of 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 dynamics under the two monetary regimes. We use it to produce counterfactual histories of the transition from one regime to another, given the estimated history of structural shocks. Our results suggest that 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 the pace of nominal exchange rate devaluations after the 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 monetary regimes.

Carlos Viana de Carvalho, André Dornfeld Vilela .

Juros e Câmbio no Brasil: Avanços e Desafios

N 646, 09/12/2015

Analiso a evolução das taxas de juros e câmbio desde o Plano Real. O objetivo é mostrar como a inter-relação entre essas duas variáveis macroeconômicas evoluiu ao longo das últimas duas décadas, gerando a atual configuração de custo de capital para as empresas brasileiras. O capítulo finaliza com uma agenda de tarefas a serem cumpridas para permitir reduzir o custo de capital, assim estimulando o investimento e aumentando o crescimento econômico.

Márcio Garcia.

E se o Brasil não tivesse adotado câmbio flutuante em 1999?

N 645, 24/11/2015

Estimamos um modelo dinâmico, estocástico, de equilíbrio geral para a economia brasileira, levando em conta explicitamente a transição do sistema de bandas cambiais para o regime de metas para a inflação com câmbio flutuante, ocorrida em 1999. O modelo estimado produz dinâmicas bastante distintas sob os dois regimes monetários. Construímos, então, algumas histórias contrafactuais da transição entres os dois regimes, utilizando as séries de choques estruturais estimados. Nossos resultados sugerem que a manutenção das bandas cambiais teria sido praticamente inviável, na medida em que a taxa de juros teria que ter permanecido em níveis extremamente elevados por vários trimestres e a atividade econômica teria contraído fortemente. Acelerar o ritmo de desvalorização da taxa de câmbio após a Crise da Ásia teria produzido taxas de inflação e de juros maiores e atividade econômica um pouco mais fraca. Por último, o modelo sugere que o primeiro semestre de 1998 pode ter oferecido uma janela de oportunidade para uma transição suave entre os dois regimes monetários.

Carlos Viana de Carvalho, André Dornfeld Vilela .

Long Term Debt and Credit Crisis in a Liquidity Constrained Economy

N 644, 22/10/2015

This paper explores the interaction between a credit crunch and the maturity

of government debt, focusing on its impacts on an economy with heterogeneous

households. We nd that an increase in debt maturity helps softening the economic

slump that follows a credit crisis. We show that, immediately after the credit shock,

there is an output drop of nearly 1% when the asset available has on average one

quarter of maturity, while a contraction of only 0.6% follows when debt duration

has three quarters. The rise of asset duration indirectly enhances the income eects

unleashed by general equilibrium price dynamics, which benets bondholders and

thus softens the recession. On the other hand, an increase on debt duration impairs

the improvement of wealth distribution on the long run. The main contribution

this paper paper is to show that debt maturity is a key element to understand the

magnitude of a recession driven by credit and its welfare consequences.

Rodrigo Abreu, Tiago Couto Berriel.

India as a creditor: sterling balances, 1940-1953

N 643, 20/08/2015

The British war effort in the Second World War depended on United States Lend Lease and the accumulation of sterling balances by neutrals, some of which would become belligerents and by the Empire. In the end of the war sterling balances corresponded to 60% of British net receipts under Lend Lease and were 15% higher than total Marshall Plan grants in 1948-52. Of the total sterling balances, about 40% were accumulated by India. This paper seeks to evaluate the costs incurred by India in the process of reduction of these balances after the war. The sources of accumulation of balances are examined and the use of the balances to repatriate India´s sterling debt is described. The issue of a British counterclaim entailing a partial cancellation of Indian balances is considered. British efforts to convince India to accept a partial cancellation of the balances are analyzed singling out the crucial role of Keynes in defining British policy The Anglo-Indian sterling balance negotiations after independence are detailed, including the disposal of balances through releases, transfer of assets to Pakistan, settlement of pensions, purchase of military stores and British gold sales. The possible contribution of British divestment to reduce outstanding balances is assessed, The Indian case is compared with those of other sterling balance holders such as Portugal, Brazil and Argentina. The links between the accumulation of sterling balances and inflation in India 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.

Robust Mechanisms: the curvature case

N 642, 13/07/2015

This note considers the problem of a principal (she) who faces a privately informed

agent (he) and only knows one moment of the distribution from which his types are drawn.

Payoffs are non-linear in the allocation and the principal maximizes her worst-case expected

profits. We recast the robust design problem as a zero-sum game played by the principal and

an adversarial nature who seeks to minimize her expected payoffs. The robust mechanism

and the worst case distribution are, then, the Nash equilibrium of such game. A robustness

property of the optimal mechanism imposes restrictions on the principal’s ex-post profit

function. These restrictions then lead to the optimal mechanism. The robust mechanism

entails exclusion of low types and distortions at the intensive margin that (in a precise sense)

are larger than what those that prevail in standard Bayesian mechanism design problems

Paulo Monteiro, Vitor Farinha Luz, Vinicius Nascimento Carrasco, Humberto Moreira.

Robust Selling Mechanisms

N 641, 26/06/2015

We consider the problem of a seller who faces a privately informed buyer and only knows

one moment of the distribution from which values are drawn. In face of this uncertainty,

the seller maximizes his worst-case expected profits. We show that a robustness property

of the optimal mechanism imposes restrictions on the seller’s ex-post profit function. These

restrictions are used to derive the optimal mechanism. The optimal mechanism entails

distortions at the intensive margin, e.g., except for the highest value buyer, sales will take

place with probability strictly smaller than one. The seller can implement such allocation by

committing to post prices drawn from a non-degenerate distribution, so that randomizing

over prices is an optimal robust selling mechanism. We extend the model to deal with the

case in which: (i) M goods are sold and the buyer’s private information is multidimensional

and (ii) the seller and the buyer interact for several periods. In the case of multiple goods,

there are several optimal mechanisms. With multiple goods full bundling is optimal, as

well as selling the goods in a fully separable way. In the dynamic model, we show that

repetition, period by period, of the static-optimal mechanism is optimal.

Vitor Farinha Luz, Paulo Monteiro, Vinicius Nascimento Carrasco, Humberto Moreira.

Human Capital Persistence and Development

N 640, 08/06/2015

This paper examines the role of human capital persistence in explaining long-term

development. We exploit variation induced by a state-sponsored settlement policy

that attracted a pool of immigrants with higher levels of schooling to particular regions

of Brazil in the late 19th and early 20th century. We show that municipalities that

received settlements experienced increases in schooling that persisted over time. One

century after the policy, localities that received state-sponsored settlements had higher

levels of schooling and income per capita. We provide evidence that long-run effects

were driven by persistently higher supply and use of educational inputs and shifts in

the structure of occupations towards skill-intensive sectors

Rudi Rocha, Claudio Ferraz, Rodrigo Reis Soares.

Procuring Firm Growth: The Effects of Government Purchases on Firm Dynamics

N 639, 22/05/2015

This paper tests whether demand shocks affect firm dynamics. We examine whether

firms that win government procurement contracts grow more compared to firms that

compete for these contracts but do not win. We assemble a comprehensive data set

combining matched employer-employee data for the universe of formal firms in Brazil

with the universe of federal government procurement contracts over the period of

2004 to 2010. Exploiting a quasi-experimental design, we find that winning at least

one contract in a given quarter increases firm growth by 2.2 percentage points over

that quarter, with 93% of the new hires coming from either unemployment or the informal

sector. These effects also persist well beyond the length of the contracts. Part

of this persistence comes from firms participating and wining more future auctions, as

well as penetrating other markets


Claudio Ferraz, Frederico Finan, Dimitri Joe de Alencar Szerman.

Central Bank Balance Sheet, Liquidity Trap, and Quantitative Easing

N 638, 12/05/2015

Tiago Couto Berriel, Arthur Galego Mendes.

Adaptive LASSO estimation for ARDL models with garch innovations

N 637, 14/04/2015

In this paper we show the validity of the adaptive LASSO procedure in estimating stationary

ARDL(p,q) models with GARCH innovations. We show that, given a set of initial weights,

the adaptive Lasso selects the relevant variables with probability converging to one. Afterwards, we

show that the estimator is oracle, meaning that its distribution converges to the same distribution

of the oracle assisted least squares, i.e., the least squares estimator calculated as if we knew the

set of relevant variables beforehand. Finally, we show that the LASSO estimator can be used to

construct the initial weights. The performance of the method in finite samples is illustrated using

Monte Carlo simulation

Marcelo Medeiros, Eduardo F. Mendes.

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