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.

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.

ℓ1-Regularization of high-dimensional time-series models with flexible innovations

N 636, 13/04/2015

We study the asymptotic properties of the Adaptive LASSO (adaLASSO) in sparse,

high-dimensional, linear time-series models. 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


Marcelo Medeiros, Eduardo F. Mendes.

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

N 647, 28/02/2015

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 .

Capital Controls and Implications for Surveillance and Coordination: Brazil and Latin America

N 631, 27/02/2015

Brazil has been one of the most active country in intervening in FX markets though several forms: sterilized interventions and foreign reserves accumulation, controls on capital inflows and FX interventions through domestic derivatives markets. During the golden phase of the commodity super-boom generated by China, the goal of the FX interventions was to deter real exchange rate appreciation. With the Brazilian experience in mind, we extract lessons for surveillance and coordination. We argue that capital controls were not a very useful tool to deter real exchange rate appreciation. Comparing Brazil with Chile, the poster child of capital controls in the nineties that decided not to use them again during the commodity super-boom of this century, we conclude that an adequate fiscal policy stance could provide much better results than the use of capital controls. Furthermore, we claim that the use of capital controls in Brazil helped to avoid necessary changes in the fiscal policy stance. Analyzing the recent experiences of Colombia and Peru also do not bring much support to capital controls. Therefore, when analyzing the implications for surveillance and coordination, international institutions, as the IMF, should take into consideration that, no matter how many caveats are listed before its guidelines, capital controls may serve mainly to bypass needed changes in macroeconomic policy, thereby jeopardizing better economic performance.

Márcio Gomes Pinto Garcia.

FX interventions in Brazil: a synthetic control approach

N 630, 19/02/2015

The taper tantrum of May 2013 generated sharp fall in risky assets prices,

including the depreciation of several emerging market currencies. To fight

excess volatility and exchange rate overshooting, the Central Bank of Brazil

announced a major program of interventions in foreign exchange markets. We

use a synthetic control approach to determine whether or not the

intervention program was successful. Our results suggest that the first FX

intervention program mitigated the depreciation of the real against the

dollar. A second announcement made later in the year that the program

was going to continue on a smaller basis had a smaller effect, which was not

significant. This result is corroborated by a standard event study

methodology. We also document that both program did not have an impact on the volatility of the exchange rate

Marcos Chamon, Márcio Gomes Pinto Garcia, Laura Candido de Souza.

Do People Understand Monetary Policy?

N 618, 10/10/2014

We combine questions from the Michigan Survey about future inflation, unemployment, and
interest rates to investigate whether households are aware of the basic features of U.S. monetary
policy. Our findings provide evidence that some households form their expectations in a way
that is consistent with a Taylor (1993)-type rule. We also document a large degree of variation in
the pattern of responses over the business cycle. In particular, the negative relationship between
unemployment and interest rates that is apparent in the data only shows up in households´
answers during periods of labor market weakness.

Carlos Viana de Carvalho, Fernanda Feitosa Nechio.

Just Words? A Quantitative Analysis of the Communication of the Central Bank of Brazil

N 617, 07/10/2014

We quantify the informational content of statements issued by the interest-rate setting committee of the Central Bank of Brazil (COPOM), building on the methodology developed by Lucca and Trebbi (2011). Using Google search queries, we measure the extent to which each COPOM statement is perceived to be associated with more "hawkish" or "dovish" language. This allows us to construct a time-series of the informational content of COPOM statements, which we then use in regressions to explain changes in the term-structure of interest rates around COPOM meetings - together with a market-based measure of interest-rate surprises. We find that, during Governor Tombini's tenure, interest-rate surprises started to be "passed through" one-to-one (or more) even at long maturities, as markets seem to have bought into the idea that the interest-rate cuts that began in mid-2011 would lead to lower yields in Brazil into the foreseeable future. Most importantly, changes in the informational content of COPOM statements seem to have meaningful e¤ects on yields at short-to-medium maturities. However, this result only holds for the period prior to Tombini's tenure.

Carlos Viana de Carvalho, Fernando Cordeiro, Juliana Vargas.

A Década Perdida: 2003 – 2012

N 626, 29/07/2014

O economia brasileira avançou na década seguinte à chegada ao poder do ex-presidente Lula. Ainda mais importante foi o avanço nos temas sociais. Não obstante, o desempenho brasileiro, quando medidoem relação ao melhor grupo de comparação entre emergentes, foi, em geral, muito aquém do que poderia ter sido. Tendo recebido um choque de renda externa mais generoso, o Brasil, em relação ao melhor grupo de comparação:1) cresceu, investiu e poupou menos; 2) recebeu menos investimento estrangeiro direto e adicionou menos valor na indústria; 3) teve mais inflação; 4) perdeu competitividade e produtividade, avançou menos em Pesquisa e Desenvolvimento e piorou a qualidade regulatória; 5) foi pior ou igual em quase todos os setores importantes; 6) a distribuição de renda, a fração de pobres, e a subnutrição caíram em linha ou um pouco menos; 7) a escolaridade avançou menos, a despeito de maiores gastos; 8) a saúde andou em linha.Fomos melhor no mercado de trabalho, onde avançamos na margem mais fácil: colocar as pessoas para trabalhar. Em suma, o Brasil avançou, mas poderia ter avançado muito mais. Neste sentido a década foi perdida.

Vinicius Nascimento Carrasco, João Manoel Pinho de Mello, Isabela Ferreira Duarte.

Rotatividade do trabalho e incentivos da legislação trabalhista

N 625, 28/07/2014

Gustavo Gonzaga, Rafael de Carvalho Cayres Pinto.

Economic gains of realized volatility in the Brazilian stock market

N 624, 30/06/2014

A model of realized variance-covariance is proposed using a portfolio with the most liquid stock

assets of Ibovespa. The purpose is to evaluate the economic gains associated with following a

volatility timing strategy based on the model’s conditional forecasts. Comparing with traditional

volatility methods, we find that economic gains associated with realized measures perform well

when estimation risk is controlled 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 Gomes Pinto Garcia, Marcelo Medeiros, Francisco Eduardo de Luna e Almeida Santos.

The impact of macroeconomic announcements in the Brazilian futures markets

N 623, 26/06/2014

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 futures markets, while the impact of the domestic ones is

mainly restricted to Interest Rate futures contracts. We additionally propose an

investment strategy based on the conditional price reaction of each market that showed

promising results in an out-of-sample study, where we are able to correctly identify

returns’ signals, conditional on the surprise’s signal, in approximately 70% of the cases.

Finally, we provide evidence that price reactions are conditional on the state of the

economy and document the impact on volume and bid-ask spreads

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

Price Discovery in Brazilian FX Markets

N 622, 23/05/2014

Brazilian Foreign Exchange (FX) markets have a unique structure: most trades are conducted in the derivatives (futures) market. We study price discovery in the FX markets in Brazil 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. 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

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

DNDFs:a more efficient way to intervene in FX markets?

N 621, 16/05/2014

We analyze the unique intervention strategy of the BCB using DNDFs (Domestic-Non-Deliverable Forwards): currency forwards that settle in domestic currency. We show the mechanisms through which DNDFs provide efficient hedging instruments for economic agents in times of reduced capital inflows and FX volatility, and how the use of DNDFs provide incentives for commercial banks to bring dollar to Brazil and so help finance the current account deficit. We discuss the limits to this strategy, which will work insofar as economic agents believe they can go from DNDFs to spot USD, i.e., that convertibility risk is negligible. We also have described how the strategy creates increasing positions within the commercial banking system (basis and roll over risks,0), generating possible threats to financial stability. The gain of not having to sell down hard currency reserves in the present strategy should be weighed against these risks. We conclude that the BCB’s strategy does provide an alternative intervention strategy, which is made possible only due to specific features of the Brazilian financial markets and its legislation. It is not clear that other emerging markets would profit from adopting such intervention strategy in FX markets.

Tony Volpon, Márcio Gomes Pinto Garcia.

Conhecimento ou Práticas Pedagógicas? Medindo os Efeitos da Qualidade dos Professores no Desempenho dos Alunos

N 620, 08/05/2014

Mauricio Fernandes, Claudio Ferraz.

Wage Differentials: Trade Openness and Wage Bargaining

N 619, 24/04/2014

We build a theoretical model that incorporates unionization in the
labor market into a Heckscher-Ohlin-Samuelson (HOS) framework to in-
vestigate the impact of unionization on the Stolper-Samuelson Theorem.
To capture the American economy case, we assume that unskilled labor in
the manufactured goods sector is unionized, and that sector is intensive
in skilled labor, and that trade liberalization increases the relative price
of manufactured goods. In the HOS model, trade liberalization induces
a reallocation of production towards the sector that uses intensively the
country's most abundant factor. The resulting change in relative labor de-
mand impacts wage bargaining in the unionized sector, which, in turn, has
a dampening e ect on the Stolper-Samuelson e ect. Moreover, wages of
unionized workers are even less responsive to trade liberalization. Through
traditional mandated-wages regressions, we show that skilled-wage di er-
entials changes were less pronounced among more unionized sectors in the
U.S. economy for the 1979-1990 period.

Gustavo Gonzaga, Beatriz Cristina Muriel Hernández, Cristina Terra.

Firms, Informality and Development: Theory and evidence from Brazil

N 632, 09/03/2014

This paper develops and estimates an equilibrium model where heterogeneous firms can exploit two margins of informality: (i) not register their business, the extensive margin; and (ii) hire workers "off the books", the intensive margin. The model encompasses the main competing frameworks for understanding informality and provides a natural setting to infer their empirical relevance. The counterfactual analysis shows that once the intensive margin is accounted for, aggregate firm and labor informality need not move in the same direction as a result of policy changes. Lower informality can be, but is not necessarily associated to higher GDP, TFP or welfare.

Gabriel Ulyssea.

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